DISK 1/2

Student 1

Winglets:  Reducing Drag

In modern financial literature, there are two techniques for discounting negative cash flows under uncertainty (Kastro, & Kulakovb, 2021, p. 87).  The first approach assumes that the RADR is applied to future hazardous cash flows regardless of whether the cash flow is an inflow or an outflow and that the RADR grows as the cash flow becomes riskier (Kastro, & Kulakovb, 2021, p. 87).  The second point of view is that the RADR for cash inflows and outflows is different when applied to similarly hazardous future cash flow (Kastro, & Kulakovb, 2021, p. 87).  As cash inflows become riskier, the RADR increases for inflows and lowers for outflows (Kastro, & Kulakovb, 2021, p. 87).  Because no unified perspective on the subject of RADR correction for non-conventional projects under uncertainty has been created to date, financial literature offers managers conflicting advice (Kastro, & Kulakovb, 2021, p. 87).  Furthermore, there is the issue of dangerous negative cash (Kastro, & Kulakovb, 2021, p. 87).

Understanding the cost savings annually is the first step in evaluating cost savings. The annual fuel savings are expressed as = 150000 gallons, while the dollar savings are given as (150000*1.06) = $ 159000.  We may calculate the present value-added to the client as an annuity because the price is expected to remain constant over the next ten years. The overall savings over the ten-year planning horizon using this fuel savings "annuity" of $159,000 is $794,984. Given the $556,000 cost of the winglets, the financial benefit per sale comes to $241,984 ($797,984 - $556,000 = $241,984) (Ross et al’s, 2012).

We got at a future year period by using the formula FV = PVx(1+r) to determine the value over a ten-year planning horizon. The present value technique of analysis is considered positive or acceptable when the present value of future inflow is greater than the present or current outflow (Ross et al., 2019).  We can find the discount rate that will make the NPV equal to zero by calculating the IRR. IRR = $556,000/$159,000 = 3.4969 Annuity PV Factor, which is almost 25.7 percent. Because the IRR of 25.7 percent is higher than the discount rate of 15%, it should be approved.

Reference

Kastroa, N. & Kulakovb, N.  (2021).  Risk-adjusted discount rates and the present value of risky nonconventional projects Anastasia.  The Engineering Economist.  Vol. 66, No. 1, p. 71-88.

Ross, S.A., Westerfield, R.W., & Jordan, B.D. (2019).  Fundamentals of Corporate Finance. 12 ed. New York:  McGraw-Hill Education.

 

Student 2

As the production manager of Textron I have been asked to evaluate what, if any, benefit can be gained financially by adding the winglet feature to our aircraft. Understanding future value over the 10 year period of the planes life needs to be considered when making the upfront investment in the feature, considering present value cost and savings.  The Future Value (FV) is the amount of money an investment will grow over a period of time at a specific rate (Excelsior College, 2022).   

A. (see attached for method of calculation)

10 year Period

Standard Total Fuel Cost= $1,590,000

15% Savings on Fuel Cost= $797,984

Cost of Winglet= $556,000

Total Savings with Winglet= $797,984- $556,000= $241,984

The total future benefit for Textron to add winglet’s to their plane today is a savings of $241,984 per plane, over a 10 year period of time. The NPV takes into account the difference between how much value is created or added today by undertaking an investment (Brealey et al., 2020). According to this method, a project is acceptable if the NPV of its future inflows is higher than the present outflow of the project. The project will create value equal to the NPV of the project for the company.

 

B. Several assumptions were outlined in the above analysis that relay on factors that may not be easy to predict. For example the fuel cost could remaining constant is not likely, and the flat savings rate would more than likely also not be constant or could fluctuate based on factors such as modifications to the production processes.

The rate of return would need to be 26%, in order to get the NPV to be 0.

At Textron we have a hurdle rate of 15%, meaning we do not want to consider any project that may provide less than a 15% rate of return. The higher rate of return would indicate that the project is viable.  It also leaves the project less susceptible to the potential changes in prices (such as fuel cost) given it is greater than 15%, and any changes in revenue would more than likely still keep the rate of return above 15%.

After careful analysis and consideration it is strongly encouraged to move forward with the upfront investment of adding winglets to our aircraft.

 

References

Brealey, R. A., Myers, S. C., & Marcus, A. J. (2020). Fundamentals of Corporate Finance. McGraw Hill Education.

Excelsior College Module 4. (2022). Module Notes: Introduction & The Time Value of Money. Retrieved from  https://excelsior.instructure.com/courses/28284/pages/module-4-module-notes-introduction-and-the-time-value-of-money?module_item_id=2462373

M4D1_Winglets work.xlsx