Financial Analysis of Aer Thomond
Evaluate the proposal
In order to evaluate the aircraft proposal we need to calculate the NPV and IRR of both the Aircraft purchasing and leasing option. Investment decisions determine the future cash flows of a company and expected future cash flows determine the value of a company.
In order to calculate the NPV we first needed to get a cost of capital. We calculated the Weighted Average Cost of Capital in order to measure the firm's cost of capital. When calculating the WACC for the Aircraft Purchasing option we included the €15 million loan in the value of debt which gave us a WACC of 10.12% versus the Aircraft Leasing options WACC of 10.34%.
The Aircraft Purchasing option has a positive NPV of €3.448 million as well as generating positive cash flows. The Aircraft Leasing option has a positive NPV of €0.895 million. NPV is an indicator of how much value a particular investment will add to the firm. The NPV of both financing options are positive, so the firm should take on this aircraft proposal; however the firm should invest in the project with the higher NPV. Therefore it seems it would add more value to the firm to undertake the purchasing option of the aircraft.
The IRR is defined as the discount rate that will cause NPV to equal zero and the point at which a project becomes profitable. The Aircraft Purchasing option has an IRR of 13.9993%. We went from a discount rate of 11.32% to 14.1% before the NPV of the Aircraft project became negative. This reflects that the project is adding significant value to the company. The Aircraft Leasing option has an IRR of 11.41%. In general an investment with an IRR that exceeds its Cost of Capital adds value to the firm and should be accepted. Both financing options have an IRR that exceed its Cost of Capital. The higher a project’s IRR the more attractive it is to accept that project. The Aircraft purchasing option has a higher IRR and it also exceeds its cost of capital by more than the Aircraft leasing
In order to evaluate the aircraft proposal we need to calculate the NPV and IRR of both the Aircraft purchasing and leasing option. Investment decisions determine the future cash flows of a company and expected future cash flows determine the value of a company.
In order to calculate the NPV we first needed to get a cost of capital. We calculated the Weighted Average Cost of Capital in order to measure the firm's cost of capital. When calculating the WACC for the Aircraft Purchasing option we included the €15 million loan in the value of debt which gave us a WACC of 10.12% versus the Aircraft Leasing options WACC of 10.34%.
The Aircraft Purchasing option has a positive NPV of €3.448 million as well as generating positive cash flows. The Aircraft Leasing option has a positive NPV of €0.895 million. NPV is an indicator of how much value a particular investment will add to the firm. The NPV of both financing options are positive, so the firm should take on this aircraft proposal; however the firm should invest in the project with the higher NPV. Therefore it seems it would add more value to the firm to undertake the purchasing option of the aircraft.
The IRR is defined as the discount rate that will cause NPV to equal zero and the point at which a project becomes profitable. The Aircraft Purchasing option has an IRR of 13.9993%. We went from a discount rate of 11.32% to 14.1% before the NPV of the Aircraft project became negative. This reflects that the project is adding significant value to the company. The Aircraft Leasing option has an IRR of 11.41%. In general an investment with an IRR that exceeds its Cost of Capital adds value to the firm and should be accepted. Both financing options have an IRR that exceed its Cost of Capital. The higher a project’s IRR the more attractive it is to accept that project. The Aircraft purchasing option has a higher IRR and it also exceeds its cost of capital by more than the Aircraft leasing