Calculate the discounted cash flow and net present value, Cost Accounting

King Airlines

King Airlines is one of many low-cost airlines in Europe. The managers want to expand the business and have an opportunity to purchase a second-hand plane to open a new service to from London to Turkey. The success of the company is dependent on achieving high load factors (the percentage of seats sold). This helps to spread the impact of rising costs, such as fuel and maintenance.

New route

The new plane will make 8 return trips every week with flights scheduled for 47 weeks. The average selling price for a ticket is £200.00 and ticket prices will increase by a minimum of 4% per annum.

The senior managers require a forecast of the expected number of passengers. The following summary was prepared by the management accountant. In the past forecasts have often been a little optimistic and can be reduced at a later date.

Year 1

Load

Probability

100% - all seats taken (maximum 200 seats)

20.00%

80% full

50.00%

50% full

30.00%

Years 2-5 (assume the plane will be in service for 5 years)

Load

Probability

100% - all seats taken (maximum 200 seats)

5.00%

80% full

65.00%

50% full

30.00%

Investment

The plane will cost £7,000,000 and in 5 years its estimated value is £1,500,000.

Fuel Costs

King Airlines has decided to pool resources to purchase fuel in bulk through alliances with other airlines. All fuel is paid for in dollars.

The annual cost of the fuel is forecast at $5,000,000

The current exchange rate is $1.50 / £1 (1GBP = 1.5USD)

The forecast exchange rate is:

Year 1

Year 2

Year 3

Year 4

Year 5

1.520

1.540

1.560

1.580

1.620

Fuel costs are very volatile. The managers agree that it would be sensible to estimate fuel cost inflation at 5% per annum.

Other costs

Variable costs are estimated at £3,200,000 per annum. These costs are expected to increase by 5% per annum.

Relevant fixed costs are forecast at £1,000,000 per annum. Management expect this cost to remain unchanged.

Tax

There are a number of capital allowances available for the company. For years 1 to 5 the accountants estimate that 30% of net cash flow will be payable in tax. Net cash flow is defined as sales less cash operating cost. Cash operating cost includes variable and fixed costs. There is a 12 month time lag for tax payments or refunds. 

Cost of capital

The weighted average cost of capital for the group is 12%. This is the nominal net of tax rate.

Note

(i)As with all courseworks the question of how much collaboration between students is acceptable is a consideration. It is expected that you will discuss the problem extensively amongst yourselves but please note that any 'sharing' of material in building the model is not acceptable.

(ii) You will be asked to show evidence of progress with model. This requires you to save previous versions of the model with dates clearly shown in model - use control ;. If you are not able to show previous work done you may get a 0 mark.

Required

(a) Model

An evaluation of the new product. This evaluation should be carried out using discounted cash flow techniques and calculating NPV.

The model will be assessed for the following:

 

Excellent

Good

Satisfactory

Poor

Not attempted

Accuracy and knowledge

 and understanding of the appropriate techniques.

 

 

 

 

 

Visual basic: User

 interface should be

 intuitive, clear and

guide the user through

 a logical flow of information

 

 

 

 

 

Methodology: Historic data, Forecast data, Workings and Reports clearly identified.

Appropriate use of

naming techniques.

 

 

 

 

 

Sensitivity analysis

including appropriate use

of data tables and graphs. See report for additional weighting.

 

 

 

 

 

Minimise errors - Clearly identify appropriate checks for reports.

 

 

 

 

 

Sensitivity analysis

I suggest a minimum of 4 data tables and 4 graphs. 

Please note the 25% weighting for Visual Basic

Additional notes

All graphs and data tables should be included in report. Do not include data tables and graphs as appendices.

All graphs and data tables need to be analysed. You will not receive any marks if you simply copy and paste tables and graphs from your model.

The model should have five worksheets:

(i) Input / Data (All data tables must be in this worksheet)

(ii) Workings / Calculations

(iii) Output / Report

(iv) Charts (You are required to copy all data tables to this worksheet)

(v) Audit (This is a summary of the progress made. Keep a record of what you complete on a daily basis) If there is a plagiarism investigation these details will be looked at)

Posted Date: 3/6/2013 1:36:08 AM | Location : United States







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