# Shao Airlines is considering the purchase of two alternative planes. Plane A has an expected life of 5 years, will cost \$100 million, and will produce net cash flows of \$28 million per year. Plane B has a life of 10 years, will cost \$132 million, and will produce net cash flows of \$27 million per year. Shao plans to serve the route for only 10 years. Inflation in operating costs, airplane costs, and fares are expected to be zero, and the company's cost of capital is 9%. By how much would the value of the company increase if it accepted the better project (plane)

41.28 million

Explanation:

the net present value of the two alternatives needs to be determined. The appropriate alternative would be the plane with the higher NPV

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

Alternative 1

Cash flow in year 0 = \$-100 million

Cash flow each year from year 1 to 5 =  \$28 million

I = 9%

NPV = \$8.91 million

Alternative 2

Cash flow in year 0 = \$-132 million

Cash flow each year from year 1 to 10 =  \$27 million

I = 9%

NPV = \$41.28 million

The second alternative has the higher NPV and it would increase the value of the company by \$41.28 million if accepted

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

The question involves determining the Net Present Value (NPV) of each plane's cash flows, discounted at the company's cost of capital. The plane that provides the higher NPV should be selected, with the difference in the two NPV's representing the use value increase for the company.

### Explanation:

To decide which project Shao Airlines should accept, we need to determine the Net Present Value (NPV) of each project. The NPV is the sum of the present values of all cash flows associated with a project, discounted at the firm's cost of capital.

For Plane A, the NPV is calculated over its expected life of 5 years. Using the formula for NPV, we get:

NPV A = (\$28 million / (1.09)^1) + (\$28 million / (1.09)^2) + (\$28 million / (1.09)^3) + (\$28 million / (1.09)^4) + (\$28 million / (1.09)^5) - \$100 million

Similarly, Plane B's NPV is calculated over 10 years. Since Shao Airlines plans to serve the route for only 10 years, it means Plane A will have to be purchased twice. Therefore, a similar NPV formula applies, but for 10 years and accounting for the double cost:

NPV B = 2 × [(\$27 million / (1.09)^1) + (\$27 million / (1.09)^2) + ... + (\$27 million / (1.09)^10)] - 2×\$132 million

The project with the higher NPV should be accepted, and its NPV relative to the alternative represents the value increase for the company.

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## Related Questions

Novak Corp. has the following transactions during August of the current year. Aug. 1 Issues shares of common stock to investors in exchange for \$10,950.
4 Pays insurance in advance for 3 months, \$1,020.
16 Receives \$780 from clients for services rendered.
27 Pays the secretary \$520 salary.
Journalize the transactions.

Explanation:

Journal entry for Novak Corp during August

Date               Account title                  Debit                  Credit

Aug 1             Cash                              \$10,950

Common stock                                                                   \$10,950

Aug 4           Prepaid Insurance           \$1,020.

Cash                                                             \$1,020.

Aug 16              Cash                                \$780

Service revenue                                                         \$780

Aug 27          Salaries expense                 \$520

Cash                                                                \$520

To journalize the August transactions for Novak Corp., Debit and Credit the appropriate accounts based on the nature and amount of each transaction. These are done on 1st, 4th, 16th, and 27th of August according to the details provided.

### Explanation:

The question is asking for the journalization of the transactions of the Novak Corp. during August. Journalizing transactions involves keeping a record of the financial activities, in the form of debit and credit, in a journal or logbook. Here is how you would journalize the transactions:

1. Aug. 1: Debit Cash account \$10,950. Credit Common Stock account \$10,950.

2. Aug. 4: Debit Insurance Expense account \$1,020. Credit Cash account \$1,020.

3. Aug. 16: Debit Cash account \$780. Credit Service Revenue account \$780.

4. Aug. 27: Debit Salary Expense account \$520. Credit Cash account \$520.

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The audit expectation gap occurs when there is a difference between the expectations of the ________. a. generally accepted accounting principles and auditors. b. auditors and company under review. c. auditors and financial statement users. d. company under review and financial statement users.

c. auditors and financial statement users.

Explanation:

This is because, the auditors and the financial statement users tends to have different views on what their responsibilities are. Since their views differs, their tend to be a gap which occurs. This gap is called audit expectation gap. This could be minimized through self regulating auditing of the financial statement before the final auditing by auditors.

Mansfield Corporation granted 4,200 of its \$2 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of \$10 per share on the grant date of the restricted stock award. Ignoring taxes, what is the compensation expense pertaining to the restricted shares in the first full year after the grant?

14,000

Explanation:

Given that,

Market value per share = 10

Shares granted = 4,200

Years of grant = 3

Total compensation expense = Market value per share × Shares granted

= 10 × 4,200

= 42,000

Compensation expense per year:

= Total compensation expense ÷ Years of grant

= 42,000 ÷ 3

= 14,000

The compensation expense pertaining to the restricted shares in the first full year after the grant is \$14,000.

### Explanation:

The compensation expense pertaining to the restricted shares in the first full year after the grant can be calculated by multiplying the number of shares granted by the fair value of the shares on the grant date. In this case, 4,200 shares were granted and the fair value was \$10 per share, so the total value of the shares is \$42,000.

Since the shares are subject to forfeiture if employment is terminated within three years, the compensation expense is recognized over a three-year vesting period.

Therefore, the compensation expense pertaining to the restricted shares in the first full year after the grant would be \$42,000 divided by three years, which is \$14,000.

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On March 4 of 1999, XYZ Corporation takes out a \$1 million loan. The company pays the interest semiannually. The six-month interest rate is six-month LIBOR 80 basis points, with a cap at 9.25%. Assume that LIBOR is at 8.5% on March 4, 1999, and 7.75% on September 4, 1999. What is the second interest payments on the loan

Explanation:

From the question, we are told XYZ Corporation takes out a \$1 million loan and the interest on the loan is paid semiannually.

We are also told that the six-month interest rate is six-month LIBOR 80 basis points, with a cap at 9.25%. Assume that LIBOR is at 8.5% on March 4, 1999, and 7.75% on September 4, 1999.

The second interest payments on the loan will be:

The interest rate will be:

Interest rate = LIBOR + 80bps

= 7.75 + 0.8

= 8.55%

Interest paid in the second period

= \$1,000,000 × 8.55%

= \$1,000,000 × 0.0855

= \$85,500

Note that there is no need for using the cap since the interest didn't exceed 9.25%

Assume that, on January 1, 2018, Matsui Co. paid \$809,600 for its investment in 35,200 shares of Yankee Inc. Further, assume that Yankee has 160,000 total shares of stock issued. The book value and fair value of Yankee's identifiable net assets were both \$320,000 at January 1, 2018. The following information pertains to Yankee during 2018: Net Income \$ 160,000 Dividends declared and paid \$ 48,000 Market price of common stock on 12/31/2018 \$ 25 /share 1. What amount would Matsui report in its year-end 2018 balance sheet for its investment in Yankee?

The amount that Matsui would report in its year-end 2018 balance sheet for its investment in Yankee is \$804992.

Explanation:

Year end balance = Beginning balance + Net income - Dividend

= \$809,600 + (35,200*36%) - (\$ 48,000*36%)

= \$809,600 + \$12672 - \$17280

= \$804992

Therefore, The amount that Matsui would report in its year-end 2018 balance sheet for its investment in Yankee is \$804992.

Monte Services, Inc. is trying to establish the standard labor cost of a typical brake repair. The following data have been collected from time and motion studies conducted over the past month. Actual time spent on the brake repairs 1.0 hour
Hourly wage rate \$12
Payroll taxes of wage rate 10%
Setup and downtime of actual labor time 20%
Cleanup and rest periods 30%
of actual labor time
Fringe benefits 25%
of wage rate
a. Determine the standard direct labor hours per brake repairs.
(Round answer to 2 decimal places, e.g. 1.25.)
Standard direct labor hours per brake repair_____________
b. Determine the standard direct labor hourly rate. (Round answer to 2 decimal places, e.g. 1.25.)
Standard direct labor hourly rate __________
c. Determine the standard direct labor cost per brake repair. (Round answer to 2 decimal places, e.g. 1.25.)