Innovation Corp. is considering the purchase of a corporate jet. The jet will cost $18 million and is expected to reduce travel expense by $3 million annually. The jet has an estimated useful life of 10 years with no salvage value. Innovation Corp. requires a return of 10% to justify the investment of this type.
a. Prepare a net present value analusis for the corporate jet. Is this an acceptable investment for Innovation Corp.? (assume no taxes)
b. Assume that you determine that the coprorate jet does not meet the investment criteria established by Innovation Corp. The managers purchase the jet anyway. Why would managers do this?
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