This report will firstly evaluate the usefulness and limitations of the two investment appraisal methods, including the Payback and Net Present Value (NPV). Secondly the report will review historical financial information. Thirdly discuss the financial issues of debt and equity. Finally the report will provide recommendations of how the company’s investment should be finance.
Barra Airways are having a board meeting regarding the financials of the company and advice on the new expansion plans. The new expansion plans are to expand into the Eastern European market, with 20 routes to still be established. Barra already offers cheap flight within Western Europe. The airliner does not offer other service such as meals during the journey; this is one way Barra make revenue. Barra has recently outgrown their aircraft and have decided to replace the old aircrafts with 20 larger fleets; Boeing 737-800. The Boeing 737-800 has significant cost advantages, allowing Barra to offer customers more affordable fares. This advantage is driven through Barra carrying a higher number of seats per aircraft (189 passengers).
The airliner will still offer cheap four one-way flights per day for the first six years, after the sixth year Barra will offer six one-way flights. The figures used in this report are assumptions given by Jura Associates (an equity research firm), Tiree and Coll Ltd (consultancy services to the airline industry) and EU population statistics.
The research for this report was obtained by three different institutions (listed above in the introduction). The researchers were making estimated assumption based on primary research they conducted. The calculations for this report were based on the assumptions provided by the three institutions. Using the data the following calculations were conducted; the first calculation was on cost as proportion of revenue, secondly revenue from seat sales and ancillary revenue, by population number (1), number of seats and load factor (2). Following these calculations the cash flow and cumulative cash flow for both methods were obtained. After all the calculations were completed the Net Present Values for both methods were calculated.
Cost as proportion of revenue was calculated by adding all the cost up from the profit and loss account, from all three years and then divided by the number of years. The net income was adjusted so that it is not reduced by depreciation expenses. According to McLany (2006a) Depreciation should not be included because it does not represent a cash inflow. Also maintenance cost was not included, as it will be taken into account in year 9. Interest and other tax are not included either, because it will be taken into account by discounting. The average revenue was taken from the profit and loss account for all three years, from seat sales and ancillary revenue, and then divided ancillary revenue by seat sales to get ancillary...