2. A budget airline is considering buying one more aircraft for domestic flights and wishes to undertake a financial analysis of the proposal. The aircraft has a life of 20 years and is expected to achieve an average 650 flights per year with an average capacity of 100 passengers per flight which can be sold at $250 per ticket starting at the end the first year. The ticket price is expected to rise (starting at the end of second year) with general rate if inflation which is 5% per year over the life of the aircraft. Total investment will be $70 million at the beginning of the first year. Annual operating costs in the beginning of each year starting in year 2, are expected to be: 1) Fuel per year: 24000 liters at a price of $40 per liter. 2) Labor: $2.5 million 3) Maintenance: $2 million 4) Overhead: $1 million Right after the second year, inflation will occur. Fuel price is expected to rise by 5%, labor costs by 8%, maintenance costs by 3% and overhead by 4%. a. Calculate net present value and benefit cost ratio for this project. Assume that the discount rate is 10%. Given the values you derived should the budget airline buy one more aircraft for domestic flight? You can type your answer in the sheet. b. From society's point of view, can you think of any other costs that are missing and should be included in evaluating if the purchase of one more aircraft should go through or not? Give a brief explanation. You can type your answer in the sheet.
2. A budget airline is considering buying one more aircraft for domestic flights and wishes to undertake a financial analysis of the proposal. The aircraft has a life of 20 years and is expected to achieve an average 650 flights per year with an average capacity of 100 passengers per flight which can be sold at $250 per ticket starting at the end the first year. The ticket price is expected to rise (starting at the end of second year) with general rate if inflation which is 5% per year over the life of the aircraft. Total investment will be $70 million at the beginning of the first year. Annual operating costs in the beginning of each year starting in year 2, are expected to be: 1) Fuel per year: 24000 liters at a price of $40 per liter. 2) Labor: $2.5 million 3) Maintenance: $2 million 4) Overhead: $1 million Right after the second year, inflation will occur. Fuel price is expected to rise by 5%, labor costs by 8%, maintenance costs by 3% and overhead by 4%. a. Calculate net present value and benefit cost ratio for this project. Assume that the discount rate is 10%. Given the values you derived should the budget airline buy one more aircraft for domestic flight? You can type your answer in the sheet. b. From society's point of view, can you think of any other costs that are missing and should be included in evaluating if the purchase of one more aircraft should go through or not? Give a brief explanation. You can type your answer in the sheet.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:2. A budget airline is considering buying one more aircraft for domestic flights and wishes to undertake a
financial analysis of the proposal. The aircraft has a life of 20 years and is expected to achieve an
average 650 flights per year with an average capacity of 100 passengers per flight which can be sold at
$250 per ticket starting at the end the first year. The ticket price is expected to rise (starting at the end
of second year) with general rate if inflation which is 5% per year over the life of the aircraft. Total
investment will be $70 million at the beginning of the first year.
Annual operating costs in the beginning of each year starting in year 2, are expected to be:
1) Fuel per year: 24000 liters at a price of $40 per liter.
2) Labor: $2.5 million
3) Maintenance: $2 million
4) Overhead: $1 million
Right after the second year, inflation will occur. Fuel price is expected to rise by 5%, labor costs by 8%,
maintenance costs by 3% and overhead by 4%.
a. Calculate net present value and benefit cost ratio for this project. Assume that the discount rate
is 10%. Given the values you derived should the budget airline buy one more aircraft for
domestic flight? You can type your answer in the sheet.
b. From society's point of view, can you think of any other costs that are missing and should be
included in evaluating if the purchase of one more aircraft should go through or not? Give a
brief explanation. You can type your answer in the sheet.
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