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A company chairman visits construction sites in his executive plane.
A company chairman visits construction sites in his executive plane. The Finance Director thinks if other employees used it as well then the plane's direct operating costs would increase by only $20,000 p.a. but he would save potentially $100,000 p.a. in staff airline bills. Against this feeling, is his belief that with the extra wear and tear the plane will need replacing after three years instead of four years. A new jet will cost $1.1million and (bearing in mind the current low rate of use) will achieve a useful life of 6 years. Thus, the Finance Director estimates the Equivalent Annual Cost of a new jet at $237,941. He has ensured the group is registered in a tax haven and is not paying taxes (for the purposes of this question). All his cash flows are forecast in real terms. The real opportunity cost of capital is 8%. Demonstrate by calculation with explanations for your reasoning, whether the F.D. should try (or not) to persuade the chairman to let other staff members use the plane?
