Express Airlines is considering the purchase of an aircraft to supplement its current fleet.In estimating the impact of adding this aircraft to the fleet,management has developed the following expected cash flows:

If the discount rate is 10%,what is the present value of these estimated flows? (Round to the nearest whole dollar)
A) $379,080
B) $224,211
C) $189,760
D) $154,869
E) $199,000

Question

Express Airlines is considering the purchase of an aircraft to supplement its current fleet.In estimating the impact of adding this aircraft to the fleet,management has developed the following expected cash flows:

If the discount rate is 10%,what is the present value of these estimated flows? (Round to the nearest whole dollar)

If the discount rate is 10%,what is the present value of these estimated flows? (Round to the nearest whole dollar)
A) $379,080 
B) $224,211 
C) $189,760 
D) $154,869 
E) $199,000

Quizplus · Accepted Answer

Step 1 - Take the present value of the first year cash flow.
PV = 11ea7fdb_fc1d_d436_a768_874d7ffbb402_TB2902_11 PV = 11ea7fdb_fc1d_d437_a768_99738d04bea6_TB2902_11 = -909.09
Step 2 - Treat the next series of 100,000 cash flows as an annuity and find the present value of it.
PV = PMT × 11ea7fdb_fc1d_d438_a768_177113328906_TB2902_11 PV = 100,000 × 11ea7fdb_fc1d_d439_a768_bd0a412378c9_TB2902_11 = $379,078.68
Using a financial calculator:
N = 5, I = 10, PMT = -100,000, FV = 0, cpt PV = $379,078.68
Step 3 - The annuity needs to be taken back to today from year 1.
PV = 11ea7fdb_fc1d_fb4a_a768_95e4203db8dc_TB2902_11 = 344,616.98
Step 4 - Discount the final cash flow back to today.
PV = 11ea7fdb_fc1d_fb4b_a768_7956c5639eae_TB2902_11 = -153,947.44
Step 5 - Add the cash flows together.
-909.09 + 344,616.98 - 153,947.44 = $189,760.45
An alternative method using a financial calculator:
CFo = 0, C01 = -1,000, F01 = 1, C02 = 100,000, F02 = 5, C03 = -300,000, F03 = 1,
NPV I = 10, cpt NPV = $189,760.45

Express Airlines Is Considering the Purchase of an Aircraft to Supplement