In early 1990, Boeing Co. decided to gamble $4 billion to build a new long-dista
ID: 2701753 • 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 Boeing%u2019s $4 billion investment is made at the rate of $800 million 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. Based on estimated annual fixed costs of $100 million, variable production costs of $90 million apiece, a marginal corporate tax rate of 34 percent and a discount rate of 14 percent, what is the break-even quantity of annual unit sales over the Boeing 777%u2019s projected 15-year life? Assume that all cash inflows and outflows occur at the end of the year.
Please show all work so I can understand the solution.
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