QUESTION 2 [10 MARKS]
Fly Namibia is an independent airline that prides itself in connecting people through local and regional flights whether for business or travel purposes. Granted designated carrier status by the Namibian Transport Commission and operating as Fly West air, the airline had its first official scheduled passenger flight on Monday 24 June 2019. Boldly changing the name to better reflect its role as a trusted Namibian carrier, the airline has been operating as Fly Namibia since November 2021. Assume that Fly Namibia is considering investing three hundred million Namibia dollars in a plane\ with an expected economic life of ten years or investing in a newer plane at a cost of five hundred million Namibia dollars which will have an expected life of twenty years. The plane will service the Windhoek-Johannesburg route. Owing to differences in capacity and fuel efficiency, Fly Namibia expects the annual cashflow from the newer plane to be one hundred and twenty million Namibia dollars per year, whilst the older plane will result in a net cash flow of one hundred million Namibia dollars per year. The residual values for each plane will be thirty percent of the cost.
The cost of capital is fourteen percent. Assume that there will be no inflation in costs or revenues. Fly Namibia expects to service this route indefinitely into the future.
|Determine which plane Fly Namibia should invest in based on relevant equivalent annual annuities. Ignore taxation||10|
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