Aviation Airways Pte Ltd is an airline and is exploring the purchase or lease of a...

Transcribed Image Text:

Aviation Airways Pte Ltd is an airline and is exploring the purchase or lease of a new aircraft to operate a new route for the coming 6 years. Aviation Airways Pte Ltd keeps a young fleet and does not operate aircraft which are more than 10 years old. The projection for the new route to be operated is as follow: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Number of flights per day 4 4 4 4 4 4 Average Load Factor 50% 55% 60% 65% 70% 70% Average Fare ($) 100 100 120 120 150 150 Variable Operating Costs 20% of revenue Fixed Operating Costs $2 million in the first year and increase by 10% each year thereafter Project Discount Rate 15% Aircraft Lease Pte Ltd is an aircraft leasing company, with the following profile: Incremental operating expenses $1 million per annum for every 5 new aircraft Borrowing rate Project discount rate 5% per annum 10% per annum The current market for aircraft purchase and lease is as follow: Aircraft list price Aircraft useful life Aircraft capacity Aircraft lease price Estimated return cost Borrowing rate $50 million per aircraft 15% volume discount for orders of 10 or more aircraft 20 years 180 seats $10 million per annum $5 million 10% per annum Conduct capital budget evaluations for Aviation Airways Pte Ltd and Aircraft lease Pte Ltd in terms of aircraft asset management. Present your recommendation(s) and its associating benefits and risks for both Aviation Airways Pte Ltd and Aircraft Lease Pte Ltd. Aviation Airways Pte Ltd is an airline and is exploring the purchase or lease of a new aircraft to operate a new route for the coming 6 years. Aviation Airways Pte Ltd keeps a young fleet and does not operate aircraft which are more than 10 years old. The projection for the new route to be operated is as follow: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Number of flights per day 4 4 4 4 4 4 Average Load Factor 50% 55% 60% 65% 70% 70% Average Fare ($) 100 100 120 120 150 150 Variable Operating Costs 20% of revenue Fixed Operating Costs $2 million in the first year and increase by 10% each year thereafter Project Discount Rate 15% Aircraft Lease Pte Ltd is an aircraft leasing company, with the following profile: Incremental operating expenses $1 million per annum for every 5 new aircraft Borrowing rate Project discount rate 5% per annum 10% per annum The current market for aircraft purchase and lease is as follow: Aircraft list price Aircraft useful life Aircraft capacity Aircraft lease price Estimated return cost Borrowing rate $50 million per aircraft 15% volume discount for orders of 10 or more aircraft 20 years 180 seats $10 million per annum $5 million 10% per annum Conduct capital budget evaluations for Aviation Airways Pte Ltd and Aircraft lease Pte Ltd in terms of aircraft asset management. Present your recommendation(s) and its associating benefits and risks for both Aviation Airways Pte Ltd and Aircraft Lease Pte Ltd.