Question

New-model commercial airplanes are much more fuel-efficient than older models. How is it possible for airlines flying older models to make money when their competitors are flying newer planes? When answering this question, consider capital budgeting. If the old planes still make money, does it make sense to buy new planes, given how long it would take to make the money back from the purchase of new planes? Explain thoroughly.

Answer 1

The revenue from old and newer models of airlines will be nearly same if no of seats are same. Newer models will save maintenance costs , fuel expenses and increased depreciation tax shield .However their initial investment might be high and the sales value of old airplanes might be low. The discounted cash saving minus new airplane purchase cost might be similar to an old airplane whose maintenance, fuel expenses might be and depreciation tax shield might be low but since there is no initial investment for the given time frame, The NPV of both airlines might be close to each other. Hence older airlines also make money.

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