The airline that you work for is considering flying a new route from

 

The airline that you work for is considering flying a new route from Brisbane to Vancouver. To do this the airline will need to buy a new aircraft that is capable of the longer distance. The plane will cost $35 million. Fuel and parking costs will be $3 million per year. In addition, you will have labour costs summing to $7 million annually. You estimate that the revenue per year will be $40 million. In order to attract passengers you will need to do a yearly marketing campaign that will cost $5,000,000. Your plane has a useful life of 10 years, will be depreciated on a straight line basis to a value of $1,000,000 and will be sold for scrap for $500,000 after 10 years when you will cease flying the route. The cost of capital is 3%. The tax rate is 35%.

  • Calculate the operating cash flows for the project.
  • Calculate the NPV of the project. Should you proceed with the project?
  • Is the IRR of this project above or below the cost of capital? Explain?
  • Calculate the payback period. If you wanted to be paid back after 3 years, should you proceed?
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