Question

A corporate jet costs $1,350,000 and will incur $200,000 per year in fixed cost (maintenance, …) and $277 per hour variable cost (fuel, …). The jet will be operated 1200 hours per year for 5 years and then sold for $650,000. The jet revenues $1,000 per hour. The MARR is 15% per year. Determine the Annual Worth (AW) of the jet.

Answer 1

Annual Worth(AW) = (-)Initial Outlay (A/P, MARR, Project life in years) + Annual Net Inflow + Discard value (A/F, MARR, year of discard)

The details given in the questiona are presented below for use in the above formula for AW:

Year	Cost	Fixed Cost	Variable Cost	Revenue	Scrap	Net Flow
	$	$	($277 X 1200 hrs)	($1000 X 1200 hrs)	$	$
0	-1350000					-1350000
1-5		-200000	-332400	1200000		667600
5					650000	650000

Therefore AW = -1350000(A/P,15%,5)+667600+650000(A/F,15%,5)

[A/P and A/F values are taken from respective compound interest rate tables]

=> AW =( -)1350000(0.2983)+667600+650000(0.1483)  

= (-)402,705 + 667,600 + 96,395

= $ 361,290