Air Australia is considering beginning a route from Brisbane to New York: This will require the
Question:
Air Australia is considering beginning a route from Brisbane to New York:
● This will require the purchase of a new Airbus A350 Long Range aircraft that will cost $350 Million. The aircraft will have a useful life of 30 years and will depreciate to 0 on a straight-line basis over its useful life.
● The company predicts it will be able to sell the aircraft for scrap for the value of $1 million.
● The aircraft will fly return from Brisbane to New York 3 times a week and each time will generate revenue of $500000 for the round trip.
● Fuel costs, parking, labour and other costs will amount to $100000 per each round trip.
● The net working capital of $10 million is needed at the beginning of the project and can be recovered fully at the end of year 30.
● By going ahead with this project the company will have to cancel its current Brisbane to Tokyo route which currently brings in $200000 in revenue and costs $80000 per trip. It currently flies twice a week.
● The business is in the 30% tax bracket, and has a cost of capital of 10% per annum.
A. What are the annual Free Cash Flows for the business?
B. What is the NPV of this project? Should the firm expand?
C. If you require a payback period of less than 14 years, would you go ahead with this project? What is the major disadvantage of the payback period metric?