326 Part Three Best Practices in Capital Budgeting
bre44380_ch12_302-326.indd 326 09/11/15 07:55 AM
market value of a Boeing 737 has varied with its age^26 and the cash flow needed in each year
to provide a 10% return. (For example, if you bought a 737 for $19.69 million at the start of
year 1 and sold it a year later, your total profit would be 17.99 + 3.67 – 19.69 = $1.97 million,
10% of the purchase cost.)
Many airlines write off their aircraft straight-line over 15 years to a salvage value equal
to 20% of the original cost.
a. Calculate economic and book depreciation for each year of the plane’s life.
b. Compare the true and book rates of return in each year.
c. Suppose an airline invested in a fixed number of Boeing 737s each year. Would steady-
state book return overstate or understate true return?(^26) We are grateful to Mike Staunton for providing us with these estimates.