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AERO2057 Airline Finance|Predecessors

You will be required to select and answer one (1) question out of the two (2) options provided.   Question 1 From a finance perspective, risk-adverse means…? Preferring projects with a higher rate of return even if they have very high risk. Not to care too much about the risk of a project. Avoiding high-risk investments. Investing in risky projects. Question 2 What are the three factors to consider when you calculate depreciation? Useful life Salvage value Capital  Depreciation method Profit and loss Question 3 The internal rate of return for four mutually exclusive projects are below. For which project should the company decide considering that they could invest in the market for 16%? 10% 15% 18% 7% Question 4 Airline cost control strategies are not including? Rebalancing and restructuring strategies Cost-cutting strategies Productivity enhancement strategies Bankrupt strategies   Question 5 Which of the following is not considered the major objectives of airline purchasing? Obtain goods and services that meet specification and are delivered on time at internationally competitive prices from suppliers with significant supplier relationships Obtain best value for money on a total cost basis Obtain efficient investment in capital Consistent procurement processes are followed in accordance with airlines policies SECTION 2: CALCULATION QUESTIONS You will be required to answer all calculation-based questions. You will be required to upload your answers on an answer sheet. These answer sheets can be in word (DOC) format, or handwritten and scanned (pdf, jpeg, png). Upload your answer sheets through the provided link for each question. Fill in your answers, and upload the sheets to submit your answers for marking. Question 1 Airline is planning to add an additional Airbus A320 to its fleet. The following is a summary of the after-tax cash flows associated with the acquisition of the aircraft: Year Net cash flow (million) 0 ($80) 1 $18 2 $24 3 $20 Calculate the project’s payback period. Answer: Question 2 You will be required to upload your answers on an answer sheet. These answer sheets can be in word (DOC) format, or handwritten and scanned (pdf, jpeg, png). Fill in your answers, and upload the sheets to submit your answers for marking through the link provided below.     Airline A receives the following fuel hedging alternatives: Alternative A: Purchases call options with the strike price of $110 and a premium of $5 per barrel for 10,000 barrels (Hedging gain/loss = (Spot Price-Strike price) *Q – (Premium*Q)) Alternative B: Enter premium collar for 10,000 barrels with the strike price of $100 and a put premium of $3 per barrel and the strike price of $130 and a call premium of $7 per barrel (Hedging gain/loss = (Put premium – Call premium) + Call option gain/loss + Put option gain/loss) Answer the following: What is the hedging gain/loss of each hedging alternative when the market price is $140 per barrel?      Which hedging strategy is better for airline A and why? Please complete your answers on a sheet of paper an upload for marking. SECTION 3: SHORT ANSWER You will be required to answer all questions provided. You will be required to upload your answers on an answer sheet. These answer sheets can be in word (DOC) format, or handwritten and scanned (pdf, jpeg, png). Question 1: Explain in your own words why the airline business is unique in a lot of different ways. You will need to elaborate briefly on: measure of the production unit (ASM/ASK) load factors setting prices and different risks. Question 2: In your own words, define interest rate, discount rate, and internal rate of return, and explain the relationship between them.  SECTION 4: EXTENDED ANSWER Please answer ONE (1) question out of the two (2) options below.  You will be required to upload your answers on an answer sheet. These answer sheets can be in word (DOC) format, or handwritten and scanned (pdf, jpeg, png).  Fill in your answers, and upload the sheets to submit your answers for marking. The questions below are based on the article “United Airlines Is Buying 270 New Planes In A Massive Bet On The Future Of Travel” by Camila Domonoske. ARTICLE: United Airlines is placing a jumbo-sized order of narrow-body aircraft. The company is purchasing 270 new planes from Boeing and Airbus. Last year, U.S. airlines were fighting to survive. Struggling in the depths of the pandemic, they received an infusion of cash and cheap loans from the U.S. government and, between aid packages, furloughed tens of thousands of workers. Things have changed, clearly. Business and international flights are still down from pre-pandemic levels, but domestic leisure travel, the kind where single-aisle planes dominate, is roaring back. United is planning for growth and ready to spend billions to get there, though it did not mention a specific price tag on Tuesday. “It’s a plan that’s a nose-to-tail plan for the future,” United’s Andrew Nocella told reporters on Monday. “And it’s something we’ve actually been working on for many, many years.” The company says this is the biggest jet purchase placed by a U.S. airline in the past decade. (In 2011, American Airlines purchased 460 planes in one fell swoop.) And factoring in the new planes that United had already ordered, the company will get 500 new jets over the next few years. They’re intended to replace some older planes and expand the total size of the fleet, allowing for more daily departures. In addition to adding new planes, United will also be retrofitting every narrow-body plane in its directly operated fleet, a process that will take several years. The retrofits will put more premium seats per aircraft, as well as add seatback entertainment on all seat backs and improve carry-on bag storage. “It’s really making the gate-checked bags a thing of the past,” promised United’s Toby Enqvist in a call with reporters on Monday. “We’re going to have space for each and every customer’s [carry-on bags] … even on a full flight.” The order will include 200 Boeing planes from the 737 Max series (which returned to service six months ago after nearly two years grounded over a deadly software flaw) as well as 70 Airbus A321neo aircraft. United, perhaps anticipating criticism for planning big investments so soon after requiring taxpayer aid, heavily emphasized the potential positive ripple effects on the U.S. economy from placing this order. The company argued that the purchase will directly create 25,000 new unionized United jobs, while indirectly supporting many more jobs at manufacturers, airports and travel destinations. And the company was adamant that air travel, even the still-depressed international and business travel, would come roaring back. Richard Aboulafia, an aviation industry analyst with the Teal Group, notes that these kinds of bulk airplane orders aren’t exactly written in stone. Airlines can place a big order but then shift exactly when the planes get delivered (and actually paid for), based on how business is going. “We’re talking about the last of these planes being delivered, if things are great, four or five years hence,” he says. “If they’re not so great, six or seven years hence. If they’re terrible, how about never — does never work for you?” And he noted that now is a reasonable time to place these orders. Borrowing money is cheap, fuel prices are rising, and new planes are more fuel efficient than their predecessors. QUESTIONS – Please answer ONE (1) question out of the two (2) options below. 1:     How many aircrafts did United Airlines Order and why? 2.     What is the purpose of United retrofitting it’s narrow-body fleet
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