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An airline is considering the purchase of an Airbus A-320neo which offers improved fuel efficiency over the previous generation of narrow-body aircraft

Economics

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An airline is considering the purchase of an Airbus A-320neo which offers improved fuel efficiency over the previous generation of narrow-body aircraft.  The list price of the A-320 is $110 million, but the airline will receive a 30% discount off of list (typical in the airline industry).  The finance department estimates the aircraft will generate a positive net cash flow of $7 million in the first year increasing by 5% annually owing to the aircraft's fuel efficiency.  The airline plans to operate the aircraft for 15 years, then sell it in year 16 for an estimated net cash price of $40 million.  The airline targets a return on invested capital of 10% annually (use this rate rather than the interest rate to discount future cash flows).  Note: This computation is easiest to perform using MS Excel.  Develop a discounted cash flow analysis using Excel and present your recommendations. Copy and paste the Excel spreadsheets into your problem set answers (do not just use Excel's built-in formulas). There are many Excel formats that could be used, including a built-in template.  Here is one format that can be used.    

 

Year NCF (millions $) Discount Factor PV (millions $)

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