Calculate the depreciation of project, Financial Accounting

A small airline company called Mancunian Airways (MA) is considering purchasing a new jet, which will be used solely on the new route: Manchester, Paris, Madrid and back to Manchester. The new route will not compete with other existing routes operated by MA. The new airplane costs £2 million. It is estimated that the route will result in additional sales of tickets worth £1.2 million over each of the next 4 years, after which the airplane will be sold. The airplane will be depreciated down to zero over its 5 years economic life using the straightDline depreciation method (this means that you depreciate the machine by the same amount every year). After 4 years the airplane will be sold for £150,000 (we call this the "salvage value" of the airplane). The additional cost to operate the machine is 20% of sales. MA needs to add net working capital of £100,000 immediately for fuel inventory and other expenses. This capital can be recovered in full at the end of the four years. The corporate tax rate is 35%. The required rate of return is 16.55%.

Please note that, when calculating the salvage value, tax liabilities or credits are generated on the difference between the resale value and the book value of the asset. In this case the salvage value of $150,000 is below the remaining book value of the airplane (which I leave for you to calculate). The resulting capital loss creates a tax credit (i.e. you can deduct this loss from your tax payments).

(a) Please calculate the NPV of the investment. Should MA proceed with the investment?

(b) Cite two sources of risk for this investment and mention how they could be reduced or transferred to other parties.

(c) Assume now that this airplane will be used at an existing route (i.e., a route already served by MA). Provide and briefly describe one example of potential incidental effects of the investment in a new jet under this alternative scenario.

(d) The airplane will be parked in the airport in a hangar that belongs to MA. This hangar is currently empty, but another company has approached MA to rent it. Should this rent be included in the NPV calculations? Please justify your answer.

(e) The accounting team has found another legal way to calculate the depreciation of the airplane. More particularly, it suggests that you should accelerate depreciations in the beginning of the lifetime of the airplane, and depreciate less later in its life. Would that accounting change affect the NPV and for what reason? You do not need to provide actual calculations.

Posted Date: 3/15/2013 3:24:37 AM | Location : United States







Related Discussions:- Calculate the depreciation of project, Assignment Help, Ask Question on Calculate the depreciation of project, Get Answer, Expert's Help, Calculate the depreciation of project Discussions

Write discussion on Calculate the depreciation of project
Your posts are moderated
Related Questions
GROUP STRUCTURES A group structure is the relationship between the holding company and its subsidiaries.  There are normally four main types of group structures (apart from the

Dawn's new car has a FMV of $20,000 and it weighs 3,000 pounds. The county also assessed a property tax on the car. The tax was 2% of its FMV and $10 per hundred weight. The car is

1. Describe the approach Zetar Plc uses to determine goodwill impairment losses. How does this approach differ from US GAAP? 2. Zetar Plc does not report any research and develo

Pre-acquisition dividends Pre-acquisition dividends may also arise in the following situations; 1 ) Where the holding company acquires the subsidiary company’s shares cum-div

Presentation method (formerly closing rate or net investment method) Under this method, the branch operates with a lot of degree of autonomy from the head office. This position i

the salaries paid in 2004 is rs. 500000 salaries outstanding is rs.20000 salaries paid in advance for 2004 is rs 30000 what is the actual salary expenditure for 2004?

Q. Calculate PV of cash flows? Estimated market value                                              $116·26 per $100 of debentures The value of 45 shares in 5 years' tim

State the Economic benefit of having accounting information Economic benefit of having accounting information is even harder to assess.  It's possible to implement some 'scienc

I would like you to take the second set of data from session 8 (the one you worked with in the first participation exercise) and do the following: 1.  Determine the number of gr

The following accounts and balances have been taken from the general ledger trial balance of Daiton Repairs Limited as at October 31, 19×2, after its first year of operation. Adjus