Corporate finance Essay Example | Topics and Well Written Essays - 750 words - 2

Corporate finance - Essay Example Therefore, the depreciation for the last is uniform and equal to $ 9,143. In the second scenario, a brand new control system at a cost of $600,000 is installed. The revenue remains the same, but the operational costs are reduced to $1,020,000. The calculation of revenue, operational costs, tax depreciation, and pre-tax profit, company’s tax, after tax income, cash flow, present value and net present value are calculated as in the first scenario. In the two scenarios, overhauling mark 1 would take it out of service for 6 months and it would resume commercial operation after an year. In the calculation done, the revenue is obtained starting second year and the operational costs are calculated from second year. The tax depreciation however, starts from the first year and the after tax income for the first year is seen to be negative meaning a loss is incurred in the first year since investment have been made yet no revenue is earned. The amount obtained after selling Mark 1 is assumed to be part of the cash used to purchase the new plane and is therefore, deducted from the initial cost. The total operating cost is the sum of annual operating costs incremented by 2.5% inflation rate every year for 20 years. There is no operating cost in the first year as the plane is delivered in the second year. From the analysis done above and the calculation of Net Present Value of the two scenarios involving overhauling of Mark 1 plane and buying a new plane, the following recommendations are hereby presented. The investment that gives a higher Net Present Value is the best provided they have the same lives (Hill 26). Overhauling Mark 1 without purchasing new control system gave an NPV of $ 150,050 while if a new control system is purchased, the NPV is $365,942.10. From the two results, inclusion of a new control system gave a higher NPV and hence considering the two options, the best investment is to purchase a new control system for the plane. When annual