Reference no: EM132761545

You have been employed as a consultant of Demons Ltd. You have recently found that the current jet of the president of Demons Ltd. is not fully utilized. You judge that its use by other officers would increase direct operating costs by only $20,000 a year and would save $100,000 a year in airline bills (note that these cash flows will occur at year end). On the other hand, you believe that, with the increased use, the company will need to replace the jet at the end of three years rather than at the end of four years. A new jet costs $1.1 million and has a life of six years (which will be replaced forever). Assume that the new jet is designed only for the president so that you do not need to consider the use of the new jet by other officers. Also, assume that the company does not pay taxes. The risk-adjusted discount rate is 8%.

Problem 1: Should you try to persuade, on economic grounds, the president to allow other officers to use his current jet before it is replaced by a new jet?