SW Airline
1.
Estimate Southwest’s expected future cash flows for each Blended Winglet per aircraft, not the total of the Winglet Projects for all Southwest aircrafts or airplanes. Each Blended Winglet has a 20 year life.
2.
Calculate the NPV, the IRR, and Payback for each Blend Winglet. 10% discount rate and $0.8 per gallon.
3. Recalculate the NPV, the IRR, and Payback for each Blend Winglet. 15% discount and $2.4 per gallon.
4. Recommend a final decision on the Winglet Project. Include both financial and nonfinancial factors in your decision.
1) Financial Factor
● NPV
The NPV of the blended winglet per aircraft is $218,567 using the discount rate of 10% and fuel price of $0.8 per gallon. Under another scenario when discount rate is 15% and fuel price is $2.4, the NPV is $1,090,513. In both of these two situation, NPV is positive number which means the savings are much greater than cost. Therefore the project is a good investment.
● IRR
The IRR is 15% using the discount rate of 10% and fuel price of $0.8 per gallon, and 42.78% with 15% discount rate and fuel price of $2.4. Both of these two rate are greater than WACC (we assume that discount rate=WACC). Considering that Southwest’s risk premium is 5%, this investment satisfied the company’s requirement.
● Payback Period
In the two situations, the payback periods is 5.71 years and 2.13 years, respectively. The payback period are both much shorter than the useful life of Blended Winglet which is 20 years. It is easy for Southwest Airlines to recover investment expenditure in a short time. So the project is an excellent choice.
2) NonFinancial Factor
● Efficient Maintenance and Safety
Comprehensive data of the problems to the “wings” is readily available to provide maintenance without harm. There would be no additional maintenance costs on the engine, but the aircraft requires an overall estimated cost in repair costs per incidental damage to the winglets. For routine maintenance
Estimate Southwest’s expected future cash flows for each Blended Winglet per aircraft, not the total of the Winglet Projects for all Southwest aircrafts or airplanes. Each Blended Winglet has a 20 year life.
2.
Calculate the NPV, the IRR, and Payback for each Blend Winglet. 10% discount rate and $0.8 per gallon.
3. Recalculate the NPV, the IRR, and Payback for each Blend Winglet. 15% discount and $2.4 per gallon.
4. Recommend a final decision on the Winglet Project. Include both financial and nonfinancial factors in your decision.
1) Financial Factor
● NPV
The NPV of the blended winglet per aircraft is $218,567 using the discount rate of 10% and fuel price of $0.8 per gallon. Under another scenario when discount rate is 15% and fuel price is $2.4, the NPV is $1,090,513. In both of these two situation, NPV is positive number which means the savings are much greater than cost. Therefore the project is a good investment.
● IRR
The IRR is 15% using the discount rate of 10% and fuel price of $0.8 per gallon, and 42.78% with 15% discount rate and fuel price of $2.4. Both of these two rate are greater than WACC (we assume that discount rate=WACC). Considering that Southwest’s risk premium is 5%, this investment satisfied the company’s requirement.
● Payback Period
In the two situations, the payback periods is 5.71 years and 2.13 years, respectively. The payback period are both much shorter than the useful life of Blended Winglet which is 20 years. It is easy for Southwest Airlines to recover investment expenditure in a short time. So the project is an excellent choice.
2) NonFinancial Factor
● Efficient Maintenance and Safety
Comprehensive data of the problems to the “wings” is readily available to provide maintenance without harm. There would be no additional maintenance costs on the engine, but the aircraft requires an overall estimated cost in repair costs per incidental damage to the winglets. For routine maintenance