The Assignment is due by 11:59PM October 7, 2022
Total Points: 25
Assignment Instructions
Please submit your assignment through the “Assessments” section on Blackboard. Please submit two files:
- An Excel Worksheet that contains your ANALYSIS.
- A Word file with your written REPORT.
Each filename must include your name and student number. The file extension for the REPORT must be .docx or .doc. The file extension for the ANALYSIS must be .xlsx or .xls. So, if your student number is 1234567 you must name the files as:
YourFirstName_YourLastName_1234567_REPORT.docx (or .doc)
YourFirstName_YourLastName _1234567_ANALYSIS.xlsx (or .xls)
Please note:
- File types that cannot be opened in Word or Excel are not accepted.
- Part of the assignment’s CRA relates to correct filenames.
- Make sure that you upload the correct files and that the files are not corrupted in any way. Markers can only mark what is provided at the time of the submission.
Outline
Source: Boom Supersonic website (www.boomsupersonic.com )
In the 1960’s Qantas had the opportunity to join supersonic travel. If successful, it would have allowed customers to eat breakfast shortly after leaving Sydney and to arrive at lunchtime in London the same day. In 1964 Qantas paid a $600,000 ($16 million in today’s money) deposit on 6 Boeing-manufactured supersonic SST (SuperSonic Transport) aircrafts. Qantas also had options to buy 4 Concordes. However, delays in the development of the Boeing-manufactured aircrafts and concerns about noise pollution created by aircrafts travelling faster than the speed of sound, known as the sonic boom, convinced Qantas management to drop the supersonic travel projects and focus to develop more conventional aircrafts instead (Source: Qantas website).
The supersonic travel entered into commercial service in 1976 with the Anglo-French Concorde project. Concorde was able to fly from London to New York in under 3 hours compared to over 8 hours of standard flights. However, many problems related to running supersonic planes made Concorde a money-losing project. Concorde experienced a crash in 2000 and the project ended in 2003.
Recently, the interest for supersonic travel returned. Among other manufacturers, there is Boom Supersonic who claim that the problems related to the Concorde project can now be mitigated. A more efficient design of supersonic planes can in fact bring the ticket cost down, potentially making viable supersonic travel a reality again. In particular, Boom Supersonic Jet Overture is designed to carry a maximum of around 75-80 passengers at Mach 1.7, or 1.7 times the speed of sound, about twice the speed of regular commercial planes. Major airlines, such as United Airlines and American Airlines, have already agreed to buy Boom Supersonic Jets. Boom “expects its newly redesigned four-engine Overture jets to roll off the production line in 2025 and carry passengers by 2029” (Source: Wall Street Journal, August 17, 2022).
A start-up airline based in Sydney (SA, Supersonic Australia) is evaluating an investment in supersonic travel. The project requires the purchase of new Boom Supersonic jets Overture that will fly from Sydney to Los Angeles. The travel time will be around 8 hours, down from 15 hours or regular commercial jets. The price of each one-way ticket is comparable to the price of business class tickets of regular commercial jets.
Boom is committed to be net zero carbon. The jets are designed to use Sustainable Aviation Fuel (SAF). SAF is jet fuel made from sustainable and renewable sources. The average fuel consumption is around 750 litres per 100 km. The distance from Sydney to Los Angeles is around 12,000 km. The price of 1 litre of SAF is $1 in 2029 dollars.
SA is evaluating to purchase 6 jets at a price of $180M each. Due to technical problems related to the long distance to be covered, the maximum passenger capacity will be reduced to 65 passengers and SA estimates that it will have an average of 60 passengers per flight. If the project is undertaken, SA will run 4 flights per day (2 flights from Sydney to LA and 2 flights from LA to Sydney) for 350 days per year. Each one-way ticket will be sold, on average, for $6,000 (in 2029 dollars).
SA will incur other annual expenses equal to $110M in 2029 dollars. These other expenses include maintenance, salaries, administrative, and other costs.
The jets useful life is 20 years. They will be depreciated using the straight-line method. At the end of the 20 years the book value will be zero and each plane will have a salvage value of $50M.
SA is also evaluating a second project that will allow to operate the jets for 30 years. The costs and revenues are the same as the costs and revenues of the 20-years project except that after the first 20 years of operations the jets are not sold but an overhaul cost of $35M per plane is paid. This will allow to operate the jets for additional 10 years. The overhaul expense is capitalised and then depreciated (using the straight-line method) over the extended life. The salvage value at the end of the additional 10 years will be zero. If SA decides to buy the supersonic jets, it must commit to either the 20 years project or the 30 years project at end of 2022 (Year 0).
The purchase price (initial outlay) is in 2028 (end of the year) dollars. Costs and revenues are in 2029 (end of the year) dollars. They will then grow at the average expected inflation rate of 2.5%. The corporate tax rate is 30%. Taxes are paid the same year the income is generated. The discount rate is 18%.
The decision to undertake or not the project has to be taken by the end of 2022 (Year 0). If one of two projects is undertaken, the planes have to be purchased at the end of 2028 (Year 6) and the first year of operations will be 2029 (Year 7). Assume that all costs are paid, and all revenues are received at the end of each year.
Task
You are a paid professional and your task is to complete the financial feasibility analysis and associated report for the management team of Supersonic Australia. The “EFB210_Assignment_Assumptions_and_Template” file provides a summary of the project details and the template for the 20 and 30 years projects.
Provide a detailed financial analysis of the project and an accompanying report that explains and justifies the methodology, summarises findings and recommends whether and which project to undertake, and highlights limitations with the analysis and recommendations.
Compute (by trial and error) the average number of passengers per flight below which each project won’t be viable (for both 20 and 30 year projects). Comment and explain how you obtained this number in the report. All the calculations in the Excel file that you submit must refer to the assumption of an average of 60 passengers per flight.
In particular:
- The financial analysis is to be completed in Excel. The file is to be easily adjustable for different scenarios and all inputs must be in the one sheet called ‘Assumptions’.
- The report is to be short (800 words +/- 20% tolerance) and written for a person with a basic understanding of financial analytical tools. The report should have the following sections:
- Summary: Brief outline of task, methodology and recommendation.
- Methodology: Explains and justifies the selected evaluation metrics.
- Recommendations: Summarises the economic viability of the project.
The analysis is to be completed for the project with a 20-year and 30-year life, where the 30-year life includes an overhaul of the planes after 20 years. Compute the average number of passengers per flight below which each project won’t be viable (for both 20 and 30 year projects).
- Limitations: Highlights at least 3 key limitations with the analysis and recommends additional analysis to alleviate these limitations where appropriate.
Disclaimer
Please note that the proposal here is for educative purposes only. Given that specific details related to the costs and revenues have not been made public yet, the figures and all other aspects of the proposal are based on estimates made for the purpose of this assignment as well as estimates reported by the financial press. Finally, please note that Boom Supersonic has provided no input into this proposal and Supersonic Australia is a fictional Australian airline carrier.
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