Eden Airlines is interested in acquiring a new airplane to service a new route. The route would be from Dallas to El Paso. The airplane would fly one round-trip daily except for scheduled maintenance days. There are 15 maintenance days scheduled each year. The seating capacity of the airplane is 150. Flights are expected to be fully booked. The average revenue per passenger per flight (one-way) is $200. Annual operating costs of the airplane follow:
|
Fuel
|
$1,400,000
|
|
Flight personnel
|
500,000
|
|
Food and beverages
|
100,000
|
|
Maintenance
|
400,000
|
|
Other
|
100,000
|
|
Total
|
$2,500,000
|
The airplane will cost $100,000,000 and has an expected life of 20 years. The company requires a 14 percent return. Assume there are no income taxes.
Required
1. Calculate the NPV for the airplane. Should the company buy it?
2. In discussing the proposal, the marketing manager for the airline believes that the assumption of 100 percent booking is unrealistic. He believes that the booking rate will be somewhere between 70 percent and 90 percent, with the most likely rate being 80 percent. Recalculate the NPV using an 80 percent seating capacity. Should the airplane be purchased?
3. Calculate the average seating rate that would be needed so that NPV = 0.
4. Suppose that the price per passenger could be increased by 10 percent without any effect on demand. What is the average seating rate needed to achieve an NPV = 0? Should the company buy the airplane?