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1. Delta Airlines has announced that it is purchasing an oil refinery from ConocoPhilips for $180 million. Of this amount, Delta is paying $150 million and will receive a grant from the State of Pennsylvania for the remaining $30 million. Delta will then spend an additional $100 million to upgrade the factory to produce jet fuel. Assume that Delta will need 87,650,000 barrels of jet fuel each year for future (this is approximately what they used in 2011).

One (1) barrel (there are 42 gallons in a barrel) of light crude oil will produce (generally) 10 gallons of jet fuel, 15 gallons of gasoline, 9 gallons of fuel oil, and 4 gallons of other products (the remaining amount is lost in the process). Assuming that (a) they can sell the gasoline, fuel oil, and other products for $0.63 over the price of crude oil (per gallon); (b) they will only purchase and refine enough oil to make the amount of jet fuel they need in a year; (c) the cost to refine oil is $0.40 per gallon of crude oil; (d) the current cost per gallon of jet fuel is $3.26; (e) the current cost per barrel of oil is $106.14; (f) the WACC for Delta is 14.5%, and (g) the factory is expected to last 12 years, and then be worthless. Based on NPV, is this a good decision for the company? Why or Why not?

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2. The October 3, 2011 issue of “The Economist” discussed a new service in which a system analyzes ALL social media (twitter, facebook, blogs, etc.,) to find real-time occurrences of key words or phrases (i.e. “McDonald’s”; “Big Mac”; “Monopoly”; etc.) and then gets that information to the purchaser of the service. Assume that by utilizing this service you could increase your revenue in the first year by $100,000.

The second year would show an increase over the current (pre-system) amount of revenue by $70,000, while the third year would show an increase of $40,000 over the current (pre-system) amount of revenue). The fourth year would result in an increase of $10,000 over the current (pre-system) amount of revenue, and then do to technology changes there would be no additional increases in revenue for the future. The cost of goods sold would remain at 25% of revenue, and the operating expenses (other than those related to the new service) would remain at 10% of revenue. The tax rate for the company is 30% and the WACC is 10%. The new service has two (2) pricing plans (neither initial fee is depreciable)

(A) $20,000 initial fee; $5,000 annual fee; and no termination fee to cancel the contract.
(B) $5,000 initial fee; $7,500 annual fee; and a $10,000 termination fee if the contract is cancelled
Would you recommend purchasing the service and why? If yes, then which pricing plan would you choose?

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