percent of the initial cost) at the end of eight years. The company tried to convince
Pharmax about profitability of the proposal and is ready to buy back the helicopter after 8
years for FFr 1.2 million.
Pharmax has some retained earnings and can also obtain adequate funds from outside
investors, if necessary, but before that it wants to be sure that the investment is
financially viable.
Current exchange rate : Rs.6.65 = FFr 1.00
Projected exchange rate after 8 years : Rs.7.50 – FFr 1.00
Operating Parameters
Essential parameters used in the financial analysis are as follows:
(a) Existing Scenario : Rs.60,000 per hour
Hiring charges
Number of hours a month for which
Helicopter is hired : 20 hours per month
Payment is done for a minimum
30 hours a month
Total hiring charges
(60,000 X 30 X 12) : Rs. 21.6 million
(b) Proposed Scenario
In case a new helicopter is bought, management can also hire it out during off hours,
hiring out charges would be Rs.75, 000 per hour. However, a maximum of only 5 hours
a month (or 60 hours per annum) would be available for hiring out.
When a New Helicopter is bought
Cost of the helicopter (12 million X 6.65) : Rs.79.8 million
Life of the helicopter : 8 years
Salvage value (1.2 million X 7.50) : Rs.9 million
(After 8 years)
Annual depreciation : (Rs.79.8 – Rs.9)/8
(Assuming straight line method of depreciation) Rs.8.85 million