low cost air company budgeting
1. Cash Flows at the Start
2. Cash Flows Over the Life
3. Cash Flows at the End
4. Net Present Value of the project
Conclusion and Recommendation
Paul Swift, an Australian aviation entrepreneur is considering launching a new budget airline called Cheap Jet. He believes a low-cost business model is still financially viable even though the big budget airlines, Jetstar and Virgin Blue, are currently operating in the market. To help investment decision, the capital budgeting analysis of Cheap Jet was performed, and the project cash flows and NPV has been estimated through the analysis.
From the projection of cash flows for the project with 15 years lifespan, it showed positive cash flows throughout the project except for the first year. The steady sales growth and low operating costs were major contributors for the positive cash flows. In addition, the NPV was estimated to be positive, which means that the project would be profitable. Based on the project cash flows and NPV, it is recommended to take up the project.
However, the project should consider other factors such as the estimation of the project life, the cost of inflation and the alternative investment for the new aircrafts.