Capital Budgeting Project

1
Capital Budgeting Project

• Gary Knight
• Greg Larsen
• Sarah Hatch

2
Buying A Plane

• Gulfstream G550
• 38,000,000
• Based out of San Francisco

3
Fixed Operating Costs (Annual)
4
Variable Costs (per flight hour)
5
Cash Flows and Depreciation

• Annual Fixed Costs 809,524.00
• Annual Variable Costs 1,281,200.00
• MACRS 7 Year Depreciation Schedule
• 31 Tax Rate
• Annual Revenue 6,000,000

6
Building the Capital

• 37.84 of Capital from personal assets
• 14,379,200 from Cash
• 62.16 of Capital from Bond Issuance
• 23,620,800 from Bonds

7
Budgeting Evaluation

• Payback Period
• Net Present Value
• Internal Rate of Return
• Weighted Average Cost of Capital

8
Payback Period

• The Payback Period for the airplane would be
  approximately 4.5 years.
• Initial Cost 38,000,000
• Revenue
• Year 1 7,140,762 (Net -30,859,238)
• Year 2 8,342,322 (Net -22,516,916)
• Year 3 7,517,722 (Net -14,999,194)
• Year 4 10,203,600 (Net -4,795,594)
• Year 5 8,850,800 (Net 4,055,206)

9
Internal Rate of Return

• The Internal Rate of Return from purchasing the
  airplane is 15.38
• Given this rate of return, we believe the project
  is worth being undertaken.

10
Net Present Value

• 14.89 Discount Rate
• Rate was determined from a WACC analysis for
  Boeing Aerospace
• NPV 584,511.91
• The positive NPV value also confirms that the
  purchase of the airplane is a profitable venture.

11
WACC Analysis

• Boeing Aerospace

12
Recommendations

• Short Payback Period
• Acceptable Internal Rate of Return
• Good Net Present Value

13
THE END.