The tree top airline (tta) is a small feeder-freight line started with very limited capital to serve the independent petroleum operators in the arid southwest. all of its planes are identical, although they are painted different colors. tta has been contracting its overhaul work to alamo airmotive for $35,000 per plane per year. tta estimates that, by building a $450,000 maintenance facility with a life of 15 years and a residual (market) value of $100,000 at the end of its life, they could handle their own overhaul at a cost of only $25, 000 per plane per year. what is the minimum number of planes they must operate to make it economically feasible to build this facility? the marr is 12% per year.

To make it feasible it will need to operate 7 or more planes.

Explanation:

450,000 maintenance facility

useful life of 15 year

salvage value of 100,000

saving cost per plane:

third party cost - own facility cost = cost savings

           35,000  -          25,000      =    10,000

present value of the salvage value: (present value of a lump sum)

salvage $ 100,000

time  15 years

Minimum accepter rate of return: 0.12000

PV   18,269.6261

present worth of the facility:

450,000- 18,268.63 = 431,731.37

Now we determinate the PMT over a 15 years period to know the cost savings per year to justify the facility:

PV431,731

time15

rate0.12

C  $ 63,388.630

As each plane cost savings are 10,000

63,388.62  / 10,000 = 6.39

the company will need to operate 7 or more planes.

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