CFA Practice Question

CFA Practice Question

You are thinking of starting a airplane leasing business. A consultant tells you that you can purchase an airplane for $30 M and your Cash Flow per year will be $4 M (NI + Depreciation) a year for the 12 years At the 12th year the book value (for tax purposes) of the airplane will be depreciated down to ZERO but you forecast that it will be sold for $5M (though you do not tell that to the IRS today). The tax rate is 40% and the discount rate for you for undertaking such a project is 9%. What will be the NPV of the project?
A. -$2.33M
B. $2.33M
C. -$4.59M
Explanation: NPV = Cash Flow Annuity for # of years - Cost + Discounted Salvage Value * (1 - Tax Rate)

User Contributed Comments 2

User Comment
aashishb more explanation needed
Jlinne Depreciation = 30/12 = 2.5
CF years 1-11 = ((4 - 2.5)*.6)+ 2.5 = 3.4
CF year 12 = 3.4 + (5 * .6) = 6.4

BA II:
CF0 - -30m
CF1 - 3.4m
F1 - 11
CF2 - 6.4

NPV
I - 9
down arrow
cpt = -4.59m
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