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Blended Winglet Project Analysis

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by

Tina Wang

on 6 November 2013

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Transcript of Blended Winglet Project Analysis

Southwest Blended Winglet Project Analysis
Discount Rates
rate of equity 5.6%
rate of debt 7.44%
debt/equity 1.14
wacc 5.029%

Scenarios
We looked into five different scenario and analysised each of them
Overall Comparison
Here's a overall of comparison of NPV and IRR across scenarios
Initial Investment


Cost of Winglets $99,400,000
Cost of Installation $8,662,000
Cost of Facilities and Modifications
$170,400
Total Initial Cost $108,232,400

Buffer?
Conservative vs. Aggressive
Rate of debt
6.5% vs. 7.44%
According to 10Q, we had 6.5% interest rate for our last debt issuance
Expected Future Cash Flow
Operating cash flow =
(revenues - cash expenses) * (1 - tax rate) +(tax rate * depreciation)
For Example:
Here's where the numbers coming from:
We calculated that the rate of equity is 5.6%.
The risk free rate of treasury bond in June 30, 2002 is 1.75%, market premium is 5%, beta for Southwest in 2002 is 1.178. By using the capital asset pricing model (CAPM).we calculated that the rate of equity is 5.6%.

For the rate of debt,
we calculated it by using net income divided by debt, which is 7.44%. The reason is that we believe after 9/11, it would be more and more difficult for the airplane industry to borrow money. Therefore, we predict the interest rate would be higher than 6.5%.

The company’s debt to equity ratio in 2002 is 1.14,
which means Southwest has 53% of debt and 47% of equity

Limits future Market Risk such as future attacks or accident, other risks could include increase cost of fuel prices and a continued decline in customers.
Counts for accounting errors or management aggressiveness.
Ensures that investors get the returned they want or expect by lower the expectations.

Why do we want 5% buffer rate?
However, after9/11, we believe airline industry has been perceived more dangerous and riskier than before. Therefore, it is likely the interest rate would be higher than 6.5%
7.44% rate of debt will give us more conservative estimates comparing to debt rate of 6.5%
Fuel Price?
Right now the fuel price is at $0.8/gallon
Southwest has program like fuel-hedging to protect them from fuel price fluctuation, mainly from increase in fuel price
We believe fuel price will increase in the next 20 years, however we also analysis scenario where the price actually dropped
Result

Net Present Value (NPV)
Without 5% $116,443,841.87
With 5% $45,856,647.49

IRR
without 5% 16.18%
with 5% 16.18%
Discoutn Rate
without 5% 5.029%
with 5% 10.029%
Result
6.5% rate of debt $49,024,460.84
7.44% rate of debt $45,856,647.49

NPV
IRR
6.5% rate of debt 16.18%
7.44% rate of debt 16.18%
Discount Rat
6.5% rate of debt 9.725%
7.44% rate of debt 10.029%
Result
3% Annual increase $50,753,670.93
3% Annual dropping $7,899,991.10

NPV
IRR
3% Annual increase 16.72%
3% Annual dropping 11.42%
Discount Rate
3% Annual increase 10.029%
3% Annual dropping 10.029%
NPV
IRR
Having an HR presence can help ensure all the procedures that are being used are ethical.

HR professionals can provide a different perspective, this can help the CFO make a decision beyond just the numbers.

HR can provide a unique position on what the people of the company think or feel about the project.

Should We Invest?

Last but not Least!
How Could HR Help?

Note: salvage value would be added back in the last year, and revenue is inflated at 2.83% annual level
Blended Winglet Project Analysis
Ariel Burks
Shu Cong
Tina Ziqin Wang
Xiaonan Yang
Furqan Hadi
Team Cray
Full transcript