Team:

1.Mayur Bansal
2.Ritambhara Bohra
3.Rajiv Sinha
4.Indira Nanda
5.Jesvicta
6. Vinod Joseph
7. Shruthi S.

4/18/12

Click to edit Master subtitle style

North Western Airlines

The current scenario is as follows:

current status of AIR TAXI

has leased two Boeing 737-200 aircrafts

Each has a capacity of 120 passengers

Has 4 owned Dornier aircrafts

Has a turnover of 92 Cr.

Has a profit of 21 Cr.

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Expansion planning

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Option 1

Introduce two
more Boeing 737400 and attain a
national airline
status.
Have to fly on
unprofitable routes
also
one of the existing
Boeings can
operate on the

Option 1
Cost of Aircraft(s)

150

Staff Training

Recurring Costs
Fuel

20

Maintenance

10

Salaries

Insurance Premium

Airport Charges

Recurring Revenues
Profitable Routes

70

Non-Profitable Routes

Salvage Value (after 8 years)

30

Sale of Aircraft

4/18/12

12

Option 2

Acquire just ONE

Boeing Airbus
320aircraft with a
capacity of 180
passengers.
Compromise on
the national
airline status.
The airline does
not have to plan
for unprofitable

Option 2
Cost of Aircraft(s)

120

Staff Training

Recurring Costs
Fuel

12

Maintenance

Salaries

Insurance Premium

Airport Charges

Recurring Revenues
Profitable Routes

55

Non-Profitable Routes

Salvage Value (after 8 years)

40

Sale of Aircraft

4/18/12

Considering the following

information

The fuel cost is expected to increase

by 5% every year while other
expenses are expected to increase
by 10%.

The fares on the profitable routes are

expected to increase by 10% a year
and the passenger occupancy was
estimated at 70%.

On the unprofitable routes, the

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passenger occupancy is estimated
at

Our solution

4/18/12

Assumptions

We are assuming that in both the

options the aircrafts have been
purchased.

Income as mentioned in the table

considers the occupancy criteria given in
the case which means that Rs. 70 Cr is
obtained by occupation of 70% of the
seats in the aircrafts.

In option 1, one of the new aircrafts

purchased will be operating on the
4/18/12
unprofitable route.

Option 1-the various

overheads

One time Cost

Recurring Costs

Cost of the
Aircraft
Training Fuel

Maintenanc
Insurance
e
Salaries Premium

Airport
Charges

Year 1

150

20

10

Year 2

21

11

5.5

5.5

5.5

Year 3

22.05

12.1

6.05

6.05

6.05

Year 4

23.1525

13.31

6.655

6.655

6.655

Year 5

24.3101

14.641

7.3205

7.3205

7.3205

Year 6

25.5256

16.1051

8.0526

8.05255

8.05255

Year 7

26.8019

17.71561

8.8578

8.857805

8.857805

Year 8

28.142

19.487171

9.7436

9.7435855
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9.7435855

Option 1-the various income

Income
Recurring Revenue

Profitable Routes

Non-Profitable Routes

Salvage Value

70

77

84.7

93.17

102.487

112.7357

124.00927

136.410197

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30

Option 1-Calculation of net

income in 8 years
IncomeC orporate
De precia ti Depre ciati Corpora t Surcharg Tax
Income on
on
e Ta x
e
+Surcha rge
28

15

13

33.5

15

18.5

37.4

15

22.4

41.7425

15

46.5744

4.55

0.2275

6.475 0.32375
7.84

0.392

4.7775

Educa tion
C ess

ReTota l Ta x Income Investme Future

Amount
After Ta x nt Ra te Value

0.047775 4.825275 23.17473

12% 51.23193

6.79875 0.0679875 6.8667375 26.63326

12.25% 53.27733

0.08232

8.31432 29.08568

12.25% 51.83355

9.82786875 0.09827869

9.9261474
4 31.81635

12.50% 50.96364

15 31.57438

11.05103
11.719618
1 0.55255 11.60358281 0.11603583
6 34.85476

12.50% 49.62718

51.9473

15 36.94732

12.93156
2 0.64658 13.57813964 0.1357814 13.713921 38.2334

10% 46.26241

57.9183

15.02141
15.930211
15 42.91833
6 0.75107 15.77248708 0.15772487
9 41.98812

10% 46.18693

64.5503

15 49.55026

17.34259
18.391818
1 0.86713 18.20972093 0.18209721
1 46.15844

10% 46.15844

26.7425 9.359875 0.46799

8.232

4/18/12

Calculation of MIRR for

Option 1

Total net income after reinvestment for 8

years=Rs. 395.54 Cr.

Total net investment is Rs. 148 Cr.

MIRR = (395.54/ 148)^(1/8)

= 1.13075

Hence the MIRR =13.075%

4/18/12

Option 2- the calculation of

overheads
One time Cost

Recurring Costs

Cost of the
Aircraft
Training

Fuel

Maintenance

Insurance
Premium

Salaries

Airport
Charges

Year 1

120

12

Year 2

12.6

8.8

3.3

6.6

3.3

Year 3

13.23

9.68

3.63

7.26

3.63

Year 4

13.8915

10.648

3.993

7.986

3.993

Year 5

11.7128

4.3923

8.7846

4.3923

Year 6

12.88408

4.83153

9.66306

4.83153

Year 7

0
0

14.172488 5.314683 10.629366

5.846151
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15.5897368
311.6923026

5.314683

Year 8

0 14.586075
15.3153787
0
5
16.0811476
0
9
16.8852050
0
7

5.8461513

Option 2- calculation of
income for 8 yrs
Income
Recurring Revenue

Profitable Routes

Non-Profitable Routes

salvage value

55

60.5

66.55

73.205

80.5255

88.57805

97.435855

107.1794405

4/18/12

40

Option 2: calculation of net

income in 8 yrs
ReIncomeCorporate
Invest Futur
Depeci DepreciaCorpora Surchar Tax+Surch Education Total Tax Income ment e
Income ation tion
te Tax ge
arge
Cess
Amount after Tax Rate value
40.178
23
10
13
4.55 0.2275
4.7775
0.047775 4.82527518.174725 0.12
53
19.998317
40.004
25.9
10
15.9
5.565 0.27825
5.84325 0.0584325 5.9016825
5 0.1225
75
39.247
29.12
10
19.12
6.692 0.3346
7.0266
0.070266 7.09686622.023134 0.1225
4
7.94272 0.397136
0.08339861 8.4232598 24.270240
38.876
32.6935
10 22.6935
5
25 8.33986125
3
63
14 0.125
23
36.65742
26.65742 9.33009 0.466504 9.79660368 0.09796603 9.8945697 26.762855
38.105
5
10
5
875
938
8
7
24
28 0.125
71
41.05247
31.05247 10.8683 0.543418 11.4117831 0.11411783 11.525901 29.526570
35.727
125
10
125
649
247
8
2
02
23
0.1
15
45.92348
35.92348 12.5732 0.628661 13.2018815 0.13201881 13.333900 32.589586
35.848
731
10
731
206
028
9
6
4
91
0.1
55
51.31989
343

10

41.31989 14.4619 0.723098 15.1850608 0.15185060 15.336911 35.982981

343
627
135
3
8
44
98

4/18/12

0.1

35.982
98

Calculation of MIRR for

Option 2

Total net income after reinvestment for 8

years=Rs. 303.97 Cr.

Total net investment is Rs. 120 Cr.

MIRR = (303.97/ 120)^(1/8)

= 1.1232

Hence the MIRR =12.32%

4/18/12

Conclusion

The calculations show that the rate of

return from Option 1 is 13.07% and that
from option 2 is 12.32%

The required rate of return from the

airline was 11.75%

Keeping this in mind, it can be seen that

both options are profitable

However option 1 is more profitable in

terms of returns as well as the brand
image of the company. Going
by option
4/18/12
1, the airline will also acquire a national

THANK YOU!!!

4/18/12