Content
1. Introduction
2. Assumption
3. Estimation
4. Accounting data
Number of planes
Ticket revenue
Operating Cost
Deprecation
Operating cash
NPV
5. Evaluation
6. Appendix
Assumptions
1. There is a perfect and efficient market.
2. It is assumed that the entire project life is on the same stage of economic cycle. In other
words, no recession or peak will occur.
3. It is assumed that the demand and supply remain constant in the entire project life.
4. It is assumed that the level of competition is fixed and the taste of customers remains the
same for the entire projection.
5. It is assumed that PJ-2 and PJ-3 are introduced the same time as planned.
6. All cash flows are incurred at the end of accounting year.
7. It is assumed that all of the planes will be replaced and the options are mutually
independent.
Estimations
1. Depreciation is a straight-line basis.
2. Cost of capital is 10%, 12% and 15% to adjust the uncertainty of introduction of PJ-1,
PJ-2 and PJ-3 respectively.
3. Fuel costs will be $2.00 per galloon by year-end and will grow at the constant rate of
15% per year.
4. Maintenance cost is $60,000 per day per plane and will grow at the constant rate of 5 %
per year.
5. Upgrading costs will grow at a constant rate of 8% per year per plane
6. One-way ticket price will be $400 and will grow at a constant rate of 4%
7. Personnel and administrative cost are expected to be 85% of ticket revenue.
8. Marginal tax is 50%.
9. Individual estimations for PJ-1, PJ2 and PJ-3 are in the Figure 1.
Factors PJ-1 PJ-2 PJ-3
Fuel consumption (gallons/flight) 4000 3000 2000
Maintenance time(days per year) 40 30 20
Upgrading costs(dollars/year ) 100000 50000 16666.67
Capacity per plane 200 250 350
Passenger load factor 0.95 0.9 0.82
Number of one-way flights 300 320 335
Cost of purchasing(dollars) 15000000 20000000 30000000
Figure 1
Accounting data
Number of planes
Federal government regulatory agency requires the service of a minimum of 300000
passengers per year to allocate the route license. Thus, numbers of the PJ-2 and PJ-3 need
to be purchased are estimated as in Figure 2.
PJ-2 PJ-3
Capacity per plane 250 350
Passenger load factor 0.9 0.82
Number of one-way flights 320 335
Minimum requirement 300000 300000
Number of flights purchased 4.166667 3.120287
Actual number purchased 5 4
Figure 2
Ticket revenue
Assume the 5 PJ-2 aircraft and 4 PJ-3 aircraft have to be purchased to meet the
government requirement. Assume the ticket price remains the same regardless of which
plane is used. Revenue is calculated by the number of flights per plane number of planes
capacity per plane load factor ticket price. In option C, the load factor for PJ-1 drops from
