Fly by Night Airlines
Content
1. Introduction page 3
2. Assumption page 3
3. Estimation page 3
4. Accounting data Number of planes page 4 Ticket revenue page 4 Operating Cost page 5 Deprecation page 5 Operating cash flows page 5 NPV page 5
5. Evaluation page 6-7
6. Appendix
Introduction Fly-by-night Airlines is a major commercial air carrier offering passenger service between most large cities in the US. Its profitable route is between Los Angeles and New York and the firm is considering replacing its old PJ-1 planes to PJ-2 or PJ-3 planes. Currently, James Baron has three options in hand to decide what to do. He uses 15 year planning horizon. Under option A, he plans to continue to use PJ-1s for three years and then replace them by PJ-2 for the remaining 12 years. Option B is the same as option A except at the end of the sixth year, PJ-2s will be replaced by the PJ-3s for the remaining 9 years. Option C doesn¡¯t plan to use PJ-2 but only PJ-3. It is planned that the PJ-3s will replace PJ-1s at the end of sixth year and for the remaining 9 years. Assumptions and estimating are made in order to have an estimated cash flow and NPV.
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
1. Introduction page 3
2. Assumption page 3
3. Estimation page 3
4. Accounting data Number of planes page 4 Ticket revenue page 4 Operating Cost page 5 Deprecation page 5 Operating cash flows page 5 NPV page 5
5. Evaluation page 6-7
6. Appendix
Introduction Fly-by-night Airlines is a major commercial air carrier offering passenger service between most large cities in the US. Its profitable route is between Los Angeles and New York and the firm is considering replacing its old PJ-1 planes to PJ-2 or PJ-3 planes. Currently, James Baron has three options in hand to decide what to do. He uses 15 year planning horizon. Under option A, he plans to continue to use PJ-1s for three years and then replace them by PJ-2 for the remaining 12 years. Option B is the same as option A except at the end of the sixth year, PJ-2s will be replaced by the PJ-3s for the remaining 9 years. Option C doesn¡¯t plan to use PJ-2 but only PJ-3. It is planned that the PJ-3s will replace PJ-1s at the end of sixth year and for the remaining 9 years. Assumptions and estimating are made in order to have an estimated cash flow and NPV.
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