31 Jul ACC 420 Module 5 Assignment 1 LASA 2 Airvalue Airways Strategic Planning
Airvalue Airways is a regional carrier whose strategy is to expand gradually as they can identify routes that offer an attractive return on the investment necessary to support successful coverage of the route. As part of this expansion, the company is planning to buy a new plane in the upcoming fiscal year. The purchasing department has narrowed the choice down to two models. One is the A220 which is manufactured in Europe. The other plane is the G435 which is built in the United States. The two aircraft have similar profiles. However, the locally-built G435 is significantly more expensive to purchase.
The A220 has an expected life of 5 years, will cost $90 million and its use will produce net operating cash inflows of $30 million per year. The G435 has a life of 10 years, will cost $128 million, and its use will produce net operating cash inflows of $25 million per year. Airvalue plans to serve the route for 10 years. When they need to purchase a new A220 at the end of five years, the cost will be $115 million net after allowing for salvage value of the used plane. Net operating cash inflows will remain at $30 million throughout the second five years. At the end of 10 years, salvage value of the G435 and of the second A220 are expected to be about the same at approximately $500,000 each.
As the company’s CFO you are to provide the financial analysis that will be considered by the strategic planning executive committee during evaluation of this expansion alternative. Your plan is to use a capital budgeting approach to the analysis in order to best assure that the decision will result in maximization of wealth for the company’s stockholders. You also want to convert the entire committee to the concept that capital budgeting should be used as the main tool for the financial analysis of capital expenditure alternatives.
The company uses the historical difference in returns between the S&P 500 and the Treasury bond rates of 7% as their estimated market risk premium. The current yield to maturity on a 10-year Treasury bond is 6.2%. Airvalue Airways’ common-stock equity beta is estimated as 1.40.
Airvalue’s capital structure is 58% common stock, 32% preferred stock and 10% long-term debt. An 8.8% after tax cost of debt has been determined and the cost of preferred stock is 12%.
Your task is to:
- Describe for other members of the strategic planning committee the role that capital budgeting should play in corporate strategic management.
- Explain why the NPV and IRR capital budgeting tools are superior to the accounting rate of return and simple payback techniques for determining the attractiveness of capital investment opportunities.
- Use the Capital Asset Pricing Model (CAPM) to identify the cost of common stock.
- Calculate the weighted average cost of capital (WACC) for the firm’s existing capital structure.
- Calculate the net present value (NPV) for each plane model using the company’s WACC as the hurdle rate.
- Recommend which plane should be purchased and justify your recommendation.
- Discuss the need to manage implementation of the project so that the higher returns can be realized. Include the strategic management keys to protecting the project from competitive forces that would erode the earning power of the project and jeopardize realization of the projected rate of return on the investment.
To complete this assignment, you must submit a 6-8 page paper that addresses the seven elements of the task as listed above and exhibits your calculations of the cost of common stock, the weighted average cost of capital, and the NPV for each plane along with an explanation of the calculations.
The paper must be submitted as a Word document and it must follow APA style guidelines.
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.