Question

The Tree Top Airline (TTA) is a small feeder-freight line started with very limited capital to serve the independent petroleum operators in the arid Southwest. All of its planes are identical, although they are pointed different colors. TTA has been contracting its plane overhaul work to Alamo Airmotive for $47,000 per plane per year. TTA estimates that, by building a $550,000 maintenance facility with a life of 18 years and a residual (market) value of $120,000 at the end of its life, they could handle their own overhaul at the cost of only $33,000 per plane per year. What is the minimum number of planes that they must operate to make it economically feasible to build this facility? The MARR is 12 % per year. (Enter your answer as a number without the dollar $ sign.)

Answer 1

Initial investment = $550,000

Salvage value = $120,000

MARR = 12%

Let us suppose we have X planes

If we don't build the facility yearly plane overhaul related expenses = $47,000X

If we build the facility yearly plane overhaul related expenses = $33,000X

What we save yearly = $15000X

These savings can be considered as positive cash flows for airlines

For finding X, do NPV = 0

X = 534395.25 / 108745.05

X = 4.91

Therefore, the airline should have at least 5 planes to make this project economical.