# The airline that you work for is considering flying a new route from

The airline that you work for is considering flying a new route from Brisbane to Vancouver. To do this the airline will need to buy a new aircraft that is capable of the longer distance. The plane will cost \$35 million. Fuel and parking costs will be \$3 million per year. In addition, you will have labour costs summing to \$7 million annually. You estimate that the revenue per year will be \$40 million. In order to attract passengers you will need to do a yearly marketing campaign that will cost \$5,000,000. Your plane has a useful life of 10 years, will be depreciated on a straight line basis to a value of \$1,000,000 and will be sold for scrap for \$500,000 after 10 years when you will cease flying the route. The cost of capital is 3%. The tax rate is 35%.

• Calculate the operating cash flows for the project.
• Calculate the NPV of the project. Should you proceed with the project?
• Is the IRR of this project above or below the cost of capital? Explain?
• Calculate the payback period. If you wanted to be paid back after 3 years, should you proceed?