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(fleet replacement) - Assignment Example

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The decision for replacing the two fleet is highly dependent on the projection done for the future costs of fuel as well as the rate of discount used. The Excel template is also provided to help with the calculation of the Net Present Values analysis. In the template, to carry…
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Download file to see previous pages try of the values and corresponding correct calculations, the template will automatically analyze and calculate the net present values of each fleet as well as the cost per available seat mile (CASM) of each fleet.
From the analysis, it is clear that the purchase price of MD-80 is estimated at $4,000,000 while its sales price after 16 years is estimated to be $100,000. This is different from the purchase price of A-320 which is estimated to be $60,000,000 while its sales price after 16 years is $25,000,000. Alone, from these figures, it can be seen that MD-80 is cheaper than A-320. The discount factors for both fleets is assumed to remain equal at 20% per annum. This is one of the major assumptions taken into consideration while carrying out the analysis. The other assumption will be that the two fleets will be purchasing fuel at the same prices yearly, this is important to enable us compare their cost of fuel usage. Since economic factors must also apply, it is assumed that the fuel costs per gallon will also be increasing each year due to factors such as inflation. This is the reason why the forecasted fuel amounts are increasing per gallon every year. As it will be difficult to estimate maintenance costs per year, it is also assumed in the analysis that it will remain constant every year from the first year in each case. The total annual operating costs per fleet is expected to increase every year since the fuel costs are also increasing per year.
From a general criterion, it is expected that the aircraft with the lowest net present CASM should be the most efficient in using its finances. This will imply that, from the analysis, the aircraft that will be of best financial choice must be one with the lowest net present CASM. As can be seen evidently from the analysis on the Excel template, MD-80 has a net present value of $56,752,036 while A-320 has $113,457,899. Looking at the Net Present CASM, MD-80 has 0.03116 while A-320 has 0.04471. From these results, it ...Download file to see next pagesRead More
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