In early 1990,Boeing Co. decided to gamble $4 billion to build a new long distan
ID: 2701752 • Letter: I
Question
In early 1990,Boeing Co. decided to gamble $4 billion to build a new long distance ,350-seat wide body airplane called the Boeing 777.The price tag for the 777, scheduled for delivery beginning in 1995,is about $120 million apiece .Assume that Boeings $4billion investment is made at the rate of 800million a year for the years 1990 through 1994 and that the present value of the tax write-off associated with these costs is 750 million. On the basis of estimated annual fixed costs of $100 million, variable production costs of $90 million apiece, a marginal corporate tax rate of 34% and the discount rate of 14%, what is the break even quantity of annual unit sales over the Boeing 777 projected 15 year life? Assume that all cash inflows and outflows occur at the end of the year
PLEASE SHOW ALL CALCULATIONS SO I CAN UNDERSTAND. (Also when posting make sure there are no wierd symbols attached which make it hard to follow .Somehow this happens quite often even when a question is posted)
Explanation / Answer
Pl see detailed working below
Contributon per Plane = Sale price - Var cost = 120-90 = 30M
ANnual Fixec costs = 100M
Assuming all Tax write off is due to Dep tax shield, we have
PV of Tax wrteoffs = 750M
Period = 15 Yrs, Disc rate = 14%
So we have Annual Tax benefit*PVA(14%,15) = 750M
ie Annual Tax benefit = 750/PVA(14%,15) = 750/6.1422 = 122M
ie Dep tax shield = Dep*34% = 122M
So Annual Dep = 122/34% = 359M
Let No of Planes at Break even be 'P'. Also at BEP, PBT=0
SO We have PBT = P*COnt per Plane - FC - Dep = 0
So P*30 - 100 - 359 = 0
ie 30*P - 459 =0
SO P = 459/30 = 15.3 ie approx 16 Planes