FINANCE

Aviation Finance

Aviation Finance

Investment Appraisal Cash Flow

A330-300

Years

2013

2014

2015

2016

2017

2018

Capital cost

-75.67

 

 

 

 

 

Residual Value

 

 

 

 

 

46

Cash Inflow

 

15

17.67

19

20.33

22.33

Cash Outflow

 

6

6.33

6.6

6.93

7.27

Net Cash Flows

-75.67

9

11.34

12.4

13.4

61.06

B777-200

Years

2013

2014

2015

2016

2017

2018

Capital cost

-91

 

 

 

 

 

Residual value

 

 

 

 

 

59.8

Cash Inflow

 

16.33

19

22.33

22.33

27

Cash Outflow

 

5.67

6

6.33

6.73

7.13

Net Cash Flows

-91

10.66

13

16

15.6

79.67

Payback Period For Each Aircraft

A330-300

Years

Cash Flows

Cumulative Cash Flows

0

-75.67

-75.67

1

9.00

-66.67

2

11.34

-55.33

3

12.40

-42.93

4

13.40

-29.53

5

61.06

31.53

 

Payback Period (years)

4.48

B777-200

Years

Cash Flows

Cumulative Cash Flows

0

-91.00

-91.00

1

10.66

-80.34

2

13.00

-67.34

3

16.00

-51.34

4

15.60

-35.74

5

79.67

43.93

 

Payback Period (years)

4.45

Profitability Index

Profitability Index = Present value of future cash flows / initial investment



A330-300

Years

Cash flow

Discount Factor

PV of Cash Flows

(n)

(CF)

(1/((1+i)^n))

(CF * PV $1)

1

9.00

0.935

9.63

2

11.34

0.873

12.98

3

12.40

0.935

13.27

4

13.40

0.873

15.34

5

61.06

0.935

65.33

 

 

 

116.56

PI

PV of future cash flows - Initial investment

116.56 -75.67

40.89

B777-200

Years

Cash flow

Discount Factor

PV of Cash Flows

(n)

(CF)

(1/((1+i)^n))

(CF * PV $1)

1

10.66

0.935

11.41

2

13.00

0.873

14.88

3

16.00

0.935

17.12

4

15.60

0.873

17.86

5

79.67

0.935

85.25

 

 

 

146.52

PI

PV of future cash flows - Initial investment

146.52 - 91

55.52

Graph of NPV

A330-300

Discount Rate

NPV

-75.67

0%

$31.53

9.00

1%

$27.10

11.34

2%

$22.96

12.40

3%

$19.11

13.40

4%

$15.51

61.06

5%

$12.16

 

6%

$9.02

 

7%

$6.10

 

8%

$3.37

 

9%

$0.81

 

10%

($1.58)

 

11%

($3.81)

 

12%

($5.90)

 

13%

($7.85)

 

14%

($9.68)

 

15%

($11.39)

 

16%

($12.99)



B777-200

Discount Rate

NPV

-91.00

0%

$43.93

10.66

1%

$38.24

13.00

2%

$32.94

16.00

3%

$27.99

15.60

4%

$23.38

79.67

5%

$19.07

 

6%

$15.05

 

7%

$11.29

 

8%

$7.78

 

9%

$4.50

 

10%

$1.44

 

11%

($1.43)

 

12%

($4.12)

 

13%

($6.63)

 

14%

($8.98)

 

15%

($11.17)

 

16%

($13.23)

Recommendation

The analysis of both aircrafts reveals that airline must buy Boeing 777 - 200 rather than A 330 - 300. It is recommended to buy Boeing 777 - 200 because this is the most profitable aircraft for the airline as co9mapred to A 330 - 300. |Though the initial investment of Boeing 777 - 200 is higher than A 777 - 200 but the cash flows from this Boeing are higher the other one. Investment appraisal techniques also prove this aircraft to be more profitable than the other one, since payback period of Boeing 777 - 200 is slightly lower than A 330 - 300. Moreover, the profitability index also back up this recommendation, since the profitability index i.e. Present value of future cash flows / initial investment of Boeing 777 - 200 is higher than A 330 - 300. Furthermore, the net present value graph of both aircrafts at different discount rates represents that Boeing 777 - 200 will present negative NPV at discount rate 11% to 16%; however, A 330 - 300 will provide NPV at discount rate 10% onwards. Thus, it is clearly apparent that Boeing 777 - 200 is much more profitable for the airline than A 330 - 300, and its payback period is also lesser than the other option. Hence, Boeing 777 - 200 must be purchased by the airline.

2) Annual Accounting Profit & ROCE

Annual Accounting Profit

Year

Cash Inflow

Cash Outflow

Cumulative cash flows

0

0

9000

-9000

1

1000

0

-8000

2

2000

0

-6000

3

3000

0

-3000

4

4000

0

1000

Or

Cash Flows

1000

2000

3000

4000

Total Return

10000

Total Outlay

9000

Total Return

10000

Net Accounting Profit

1000

ROCE

ROCE of Machine

Total Return

10000

Total Investment

9000

Return On Capital Employed

1.11

Advantages of ROCE as an Appraisal Method

Among several investment appraisal techniques, return on capital employed method is one of the most widely used techniques in practice; however, its popularity is possibly decreasing. There are several advantages of ROCE technique, including that ROCE evaluates an investment based on the percentage rate of return, which indicates that it is using the concept with which all managers are familiar (Lucey, 2003, p.530). For instance, in above scenario, the investment has four year payback that does not instantly point out whether it is profitable4 or not; however, being determined that the investment is expected to provide 1.11% return on capital would reveal it probably desirable for the airline. Thus, the return on capital reveals the significant factor of return on investment that the company needs to know in order to invest ...