2. AirExpress bought a used Boeing 757 plane 5 years ago for $35,000,000. At the
time the plane was bought, it was estimated that it would have a service life of 10
years and its salvage value at the end of its service life would be $10,000,000.
AirExpress's CFO has recently proposed to replace the old plane with a modern
Boeing 777 plane that is expected to last for 15 years. The new plane will cost
$75,000,000, will provide $3,000,000 savings in operating and maintenance costs,
will increase revenues by $5,000,000, and will have $20,000,000 salvage value
(after 15 years). The seller of the new plane is willing to trade in the old plane for
its current fair market value, which is $8,000,000. The CFO estimates that if the
old plane is kept for 5 more years, its salvage value will be $4,000,000. If
AirExpress's MARR is 10% per year, what would you advise the company to do -
- keep the old plane or replace it with the new plane? Solve the problem using
replacement analysis.
