The Boeing Corp is considering building a new aircraft, the 787—larg

The Boeing Corp is considering building a new aircraft, the 787—larger than the 747 and larger than the Airbus A380. The company’s Renton WA Facility, where 747s are currently manufactured, would have to be expanded.

Expansion costs are forecast to be $2.5B, incurred at t = 0. Also at time t = 0, before production begins, inventory will be increased by $1.855B. Assume that this inventory is sold at the end of the project at t = 2. The first sales from operation of the new plant will occur at the end of year 1 (t = 1 ). Boeing forecasts sales of 220 planes in each of the two years. The plane will be sold for $130M each. The cost of manufacturing a plane is $115M. Annual overhead expenses are $775M. The construction facilities are classified as 15 year property. When the plant is closed it will be sold for $1B. The company is in the 34% marginal tax bracket. Boeing’s cost of capital is 12%. What are the terminal year cash flows?

MACRS Depreciation Rates
Year 10-Year 15-Year
1 10.00% 5.00%
2 18.00% 9.50%
3 14.40% 8.55%

A) $1,747M
B) $3,134M
C) $3,242M
D) $4,989M
E) $5,089M

ANSWER

D