USE EXCEL FUCTIONS AND SPREADSHEET TO SHOW YOUR WORK Epsilon Airlines is conside

Question

USE EXCEL FUCTIONS AND SPREADSHEET TO SHOW YOUR WORK

Epsilon Airlines is considering installing winglets on airplane to save fuel. Winglets come in two designs, but are not necessary for the plane to operate. Cost and savings for a single aircraft are shown below. Use rate-of-return analysis over an eight year planning horizon to determine which winglets if any to purchase, assuming MARR is 18%. A. What are the first two alternatives to analyze? Alternative A: Alternative B: B. Analyze are the first two alternatives and identify the survivor: Interest = Which alternative do you keep: C. Analyze the next two alternatives and select the Pest alternative: New Alternative A: New Alternative B.

Explanation / Answer

The problem is relateed with capital project. Two different types of wings can be used in plane, athough their use is not compulsory. Wings are, Bent wings and Split wings. Both can be used for 8 years. They can save fuel cost. Initial investments are needed. Also there will be operating cost. Required rate of return is 18%.

In order to evaluate the projects, consider net profit of each year. Then ascertain their present value. Use 18% rate. Add annual present value of net worth to get net present worth of the project. The alterative having highest NPW can be selected.

Another method is to calculate Internal rate of return. It is the discounting rate that will make Net present worth zero. It is the maximum return that can be earned from the project. The calculations are shown below:

Let

Alternative A: Bent wing

Alternative B: Split wing

The net cash flow ad present worth are as follows:

Here net present worth of A is $149,603 and for B is $38,242. Thus A has better NPW. So it will be preferred over B.

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Note that at 18% MARR both project has positive NPW. IRR is the rate which will make NPW zero. It is ascertained by incrersing discouting rate to 30%. At this rate NPW of both A ad B are negative. So IRR will be between 18% to 30%. Use interpolation in excel sheet to get the rsult. It is shown below

As IRR of A is highest, it is preferred.

Statement showing calculation of present worth and Internal rate of return (IRR) Interest= 18% A. Bent Wing B. Split wing Discount Present Present B-A factor 18% worth A worth B Year Costs Savings Net profit Costs Savings Net profit Cash flows 0 650000 -650,000 1100000 -1,100,000 -450,000 -650,000 -1,100,000 1 10,000 180000 170,000 30000 270,000 240,000 70,000 0.847458 144068 203389.83 2 10,000 189000 179,000 30000 283,500 253,500 74,500 0.718184 128555 182059.75 3 10,000 198450 188,450 30000 297,675 267,675 79,225 0.608631 114696 162915.27 4 10,000 208373 198,373 30000 312,559 282,559 84,186 0.515789 102318 145740.66 5 10,000 218791 208,791 30000 328,187 298,187 89,396 0.437109 91264.5 130340.15 6 10,000 229731 219,731 30000 344,596 314,596 94,865 0.370432 81395.2 116536.29 7 10,000 241217 231,217 30000 361,826 331,826 100,609 0.313925 72584.9 104168.43 8 10,000 253278 243,278 30000 379,917 349,917 106,639 0.266038 64721.3 93091.306 Total 988,840 1,238,259 249,420 4 149,603 38,242

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