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Ghost Squadron Historical Aircraft, Inc. (GSHAI) is considering adding a rare World WarII B-24 bomber to its collection of vintage aircraft. The plane was forced down in Burma in 1942, and it has remained there ever since. Flying a crew to Burma and collecting the wreckage will cost $100,000. Transporting all the parts to the companys restoration facility in Texas will cost another $35,000. Restoring the plane to flyable condition will cost an additional $600,000 at t0.

GSHAIs operating costs will increase by $40,000 a year at the end of years 1 through 7 (on top of the restoration costs). At the end of years 3 through 7, revenues from exhibiting the plane at airshows will be $70,000. At the end of year 7, the plane will be retired. At that time, the plane will be sold to a museum for $500,000.

The plane falls into the MACRS depreciation class for seven-year assets. GSHAIs combined federal and state income tax rate is 35percent, and the companys weighted average cost of capital is 12percent. Calculate the NPV and IRR of the proposed investment in the plane.

A B D E F G H 1 Yr 1 14.3% Yr 2 24.5% Yr 3 17.5% Yr 4 12.5% Yr 5 8.9% Yr6 8.9% Yr 7 8.9% Yr 8 4.5% 35% 12% 15 ASSUMPTIONS: 16 17 MACRS Depreciation 18 19 Tax rate 20 Cost of capital 21 22 23 ESTIMATED INCREMENTAL CASH FLOWS: 24 25 Initial Investment at t=0: 26 27 Crew transport & wreckage collection 28 Transport to restoration facility 29 Plane restoration 30 Total Initial Investment 31 32 Year: 33 34 New Revenues 35 Additional operating expenses 36 Depreciation on plane 37 Change in Operating Income 38 Tax on new income 39 Change in Earings after tax 40 41 Add back depreciation 42 43 Net Incremental Cash Flows 44 45 Additional Cash Flows at the end of year 7: 46 47 Proceeds from sale of plane 48 Book value of plane 49 Taxable gain(loss) 50 51 52 Net cash flow from sale of plane 53 (Salvage value less tax on gain) 54 55 56 SUMMARY OF NET CASH FLOWS: 57 Time: 58 59 60 61 Net present Value: 62 63 Internal rate of Return: 64 Tax on gain A B D E F G H 1 Yr 1 14.3% Yr 2 24.5% Yr 3 17.5% Yr 4 12.5% Yr 5 8.9% Yr6 8.9% Yr 7 8.9% Yr 8 4.5% 35% 12% 15 ASSUMPTIONS: 16 17 MACRS Depreciation 18 19 Tax rate 20 Cost of capital 21 22 23 ESTIMATED INCREMENTAL CASH FLOWS: 24 25 Initial Investment at t=0: 26 27 Crew transport & wreckage collection 28 Transport to restoration facility 29 Plane restoration 30 Total Initial Investment 31 32 Year: 33 34 New Revenues 35 Additional operating expenses 36 Depreciation on plane 37 Change in Operating Income 38 Tax on new income 39 Change in Earings after tax 40 41 Add back depreciation 42 43 Net Incremental Cash Flows 44 45 Additional Cash Flows at the end of year 7: 46 47 Proceeds from sale of plane 48 Book value of plane 49 Taxable gain(loss) 50 51 52 Net cash flow from sale of plane 53 (Salvage value less tax on gain) 54 55 56 SUMMARY OF NET CASH FLOWS: 57 Time: 58 59 60 61 Net present Value: 62 63 Internal rate of Return: 64 Tax on gain

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