Question

Hampson Industries was selected by Eclipse Aviation to build the tail section of the company’s new corporate jet, a six seater that will cost roughly $950,000 to purchase. The company has booked orders through late 2008 and hopes to begin production in 2006. The agreement was valued at $380 million. If production begins with 10 planes in January 2006 and then increases by 10 planes each month until reaching a capacity of 100 planes per month, what is the present value (December 2005) of revenues from the first three years of aircraft sales for Hampton? Assume Hampton is paid $190,000 for each tail section and receives payment when an aircraft is sold. Assume further that cash flows are monthly, the monthly interest rate is 1.25%, and all planes produced are sold.

Answer 1

The whole cashflow, along with NPV is shown below.

Month	No of Planes	Cashflow from tail sections
Jan-06	10	1900000
Feb-06	20	3800000
Mar-06	30	5700000
Apr-06	40	7600000
May-06	50	9500000
Jun-06	60	11400000
Jul-06	70	13300000
Aug-06	80	15200000
Sep-06	90	17100000
Oct-06	100	19000000
Nov-06	100	19000000
Dec-06	100	19000000
Jan-07	100	19000000
Feb-07	100	19000000
Mar-07	100	19000000
Apr-07	100	19000000
May-07	100	19000000
Jun-07	100	19000000
Jul-07	100	19000000
Aug-07	100	19000000
Sep-07	100	19000000
Oct-07	100	19000000
Nov-07	100	19000000
Dec-07	100	19000000
Jan-08	100	19000000
Feb-08	100	19000000
Mar-08	100	19000000
Apr-08	100	19000000
May-08	100	19000000
Jun-08	100	19000000
Jul-08	100	19000000
Aug-08	100	19000000
Sep-08	100	19000000
Oct-08	100	19000000
Nov-08	100	19000000
Dec-08	100	19000000
	NPV	$466,374,517.32

As shown, the NPV is ~466.37 million dollars.

The NPV has been calculated by the formula =NPV(interest rate,cashflow).

It can also be calculated manually by the following formula

NPV= Cashflow1/(1+r)+cashflow2/(1+r)2+.....+cashflow n/(1+r)n

where r is interest rate and n is numberof months.