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United Airlines plan to buy 34 airplanes for $120,000,000. Flight operations and ground costs are expected...

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Finance

United Airlines plan to buy 34 airplanes for $120,000,000.Flight operations and ground costs are expected to be $7,000,000per year and $4,000,000 per year respectively. United expects tosell 300,000 tickets and variable costs are expected to be 20percent of revenue. With a 14 percent required rate of return, whatminimum price per ticket are needed to justify the purchase of theairplanes? (Assume a 20- year life and no salvage value for theairplane at the end of 20 years)(Hint: Income = Rev. - Variablecost-Fixed Cost, find annual revenue).

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3.6 Ratings (409 Votes)

Step-1:Calculation of annual revenue
Suppose minimum price per ticket is \"x\"
Per Unit Total
Sales x 300000x $ 121.33
Less:
Variable cost 0.20x 60000x $    24.27
Contribution Margin 0.80x 240000x $    97.06
Less:
Fixed Cost:
Flight Operations $       70,00,000
Ground Costs $       40,00,000 $          1,10,00,000
Net annual revenue 240000x-11000000
Step-2:Calculation of present value of annuity of 1
Present value of annuity of 1 = (1-(1+i)^-n)/i Where,
= (1-(1+0.14)^-20)/0.14 i 14%
= 6.623130552 n 20
Step-3:Calculation of minimum price per ticket
As per question,
Present value of annual revenue = Initial cost of investment
240000x-11000000 * 6.623131 = $       12,00,00,000
240000x-11000000 = $    1,81,18,320.19
240000x = $    2,91,18,320.19
x = $                   121.33
So,
Minimum price per ticket is $ 121.33
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