25 Jul EXPLAIN YOUR ASSUMPTIONS AND METHODOLOGY CONCISELY.
This assignment has three objectives to: 1) become familiar with the type and magnitude of mainline Show more This assignment has three objectives to: 1) become familiar with the type and magnitude of mainline aircraft operating costs; 2) understand the operating economics of new versus older aircraft; and 3) see how net present value analysis is used in capital acquisition decision-making. Allegiant Airlines has engaged the aviation consulting firm SH&E to evaluate whether it should continue its fleet expansion with new aircraft instead of the aging McDonnell Douglas MD-80 aircraft that are the backbone of its small fleet. You are the senior financial analyst assigned to this project and will prepare a memorandum with your conclusions to Allegiants president Andrew Levy. Background Allegiant Airlines a small successful US low-cost-carrier has been aggressively expanding by purchasing used MD-80 aircraft. In its latest acquisition of 18 MD-80s from Scandinavian Airways System Allegiant paid roughly $4 million dollars per plane in an all cash transaction. Although these aircraft have a useful service life of 20 more years Allegiant recognizes it must eventually modernize its fleet. As with all older aircraft the MD-80 burns more fuel and requires more maintenance than new generation aircraft of equal mission capability. Escalating and volatile fuel prices have added to senior managements interest in evaluating new aircraft. As you will see this decision is critically dependent on your projection for future fuel costs and the discount rate (interest rate) employed. Task This assignment requires you do to an analysis. There is additional information and instructions contained in the Fleet Replacement Analysis Instructions hyperlink below. To do the anaylsis choose either the Airbus A-320 or the Boeing 737 for comparison with the existing MD-80. Enter data into the Excel template. Run a few sensitivity analyses with varying fuel and discount rates to see how the fleet replacement decision changes. Remember that the net present value obtained is a total cost of operation. The spreadsheet computes the cost per available seat mile (CASM). The fleet alternative with the lowest net present value CASM is the best financial choice. Prepare a short memorandum to the President summarizing your analysis and making a recommendation. Remember that executive management needs to understand what you have done but will not read a memorandum more than two pages long. Explain your assumptions and methodology concisely. Insert and reference Excel spreadsheets as appendices to support your fleet replacement recommendation. Show less
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