Question

In an effort to capture the large jet market, Wright Brothers Aviation invested $12 billion developing its 1903A, which is capable of carrying 800 passengers. The plane has a list price of $170 million. In discussing the plane, Wright Brothers Aviation stated that the company would break even when 170 1903As were sold.

a. Assuming the break-even sales figure given is the accounting break-even, what is the cash flow per plane? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole dollar amount, e.g., 32.)
b. Wright Brothers Aviation promised its shareholders a return of 30 percent on the investment. If sales of the plane continue in perpetuity, how many planes must the company sell per year to deliver on this promise? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
c. Suppose instead that the sales of the 1903A last for only 10 years. How many planes must Wright Brothers Aviation sell per year to deliver the same rate of return? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

a) $70,588,235 per plane

b) 51 planes per year

c) 54.99 planes

Step-by-step explanation:

initial investment $12,000 million

unit price $170 million

break even point = 170 x $170 million = $28,900 million

cash flow per plane = initial cost / break even number = $12,000 million / 170 units = $70,588,235 per plane

$12,000 million x 30% = $3,600 million in returns

$3,600,000,000 / $70,588,235 per plane = 51 planes per year

if the project lasts only 10 years, then its yearly returns = $12,000 / 3.09154 (PV annuity factor, 30%, 10 periods) = $3,881,560,606

number of planes sold per year = $3,881,560,606 / $70,588,235 per plane = 55 planes