Marks

• This assignment is marked out of 100 and contributes 40% to the overall assessments.

Due Date

• The report must be submitted via Turnitin/Canvas by 11:59 PM on the due date 14 May 2024.

Submission Instructions

• Upload a PDF file of your report, and the spreadsheets with your calculations to the Turnitin/Canvas submission link.

Case

Qantas Airways Ltd (QAN.AX) has appointed you and your team to provide strategic guidance to the company’s capital budgeting division. Qantas is an Australian airline company that offers domestic and international passenger transportation services, air cargo, and express freight services. The company is headquartered in Mascot, New South Wales. It operates its business through the following segments: Qantas Domestic, Qantas International, Jetstar Group, Qantas Loyalty, and Corporate. The current fleet has 137 aircrafts, with an average age of 14.9 years.

Currently, the company is evaluating the feasibility of opening an additional 20 routes to different destinations within Asia. Your team has been tasked with assessing the financial viability of this proposed project.

Qantas has already invested $600 million two years ago, in a first (partial) downpayment for a series of pre-ordered Airbus airplanes. If the decision is made to proceed with the new project, the in total 20 newly purchased planes would represent a 28% expansion in the company’s assets. The expected operational lifespan of the planes will be 10 years. It is anticipated that at

that point, the airplanes will be sold at a value equivalent to 30% of their original cost. To finance a part of the additional investments, the company intends to secure a $900 million loan at an interest rate matching the average cost of debt of the firm.

In the first year after opening the new routes throughout Asia, it is predicted to boost the company’s annual revenue by roughly 8%, compared to the total revenues recorded for the financial year ending in June 2023. In the following years, revenues are estimated to grow by 3.7% per annum.

Your team’s responsibility is to determine the free operating cash flows linked to this proposed project. The CFO of Qantas has indicated that it would be reasonable to expect that the operating costs of the new routes will be of similar proportion relative to the revenues as the airline’s other routes. Additionally, the extra routes to Asia will require an investment in net working capital (NWC) equal to approximately 33% of the project’s first-year revenues. Depreciation of the new planes is to be calculated on a straight-line basis over the project’s entire lifespan, ultimately reducing the asset’s book value to zero. For determining the cost of debt, the CFO of Qantas suggests computing the yield-to-maturity on the company’s bonds. The cost of equity of the company is 9.12%.

Requirements

The results of your analyses will have to be presented in a report to Qantas’ executive management team. The report should provide clear advice on whether or not the company should go ahead with the projected power plant. The advice of your team should be based on your estimations of the NPV and the IRR of the proposed project. Remember, members of the executive management team often do not have a finance background, so your results will have to be supported by clear explanations of the methods applied, how all metrics were computed, and what choices were made in these computations and why.

Instructions

• Obtain Qantas’ financial statements. Download the annual income statement, balance sheet and cash flow statement over the last fiscal year. One place to find the financial statements is on investing.com, find the company and click on Financials. Make sure to get the annual financial statements, instead of the quarterly.
• Determine the free cash flows of the new project. Set up a timeline in a spreadsheet, which allows you to compute the free cash flows of the project on a yearly basis, in a separate column for each year of the project’s life. Be sure to make outflows negative and inflows positive.
• As mentioned, the project would represent a 28% expansion in the company’s assets. So is reasonable to expect that the total initial investment in the new planes would approximately be 28% of the company’s current (net) gross property, plant, and equipment (PPE).
• To estimate the annual operating costs of the project, assume, as the CFO indicated, that the project’s profitability, the ratio of Revenue / Operating costs (Operating costs may also be labelled as “Costs of Revenue”) will be similar to the company’s existing business.

• Assume that the cost of capital of the new plant will be equal to the company’s weighted average cost of capital (WACC). Information on the company’s bonds can be found on Investing.com.

Report

The report is to be presented as a business report to Qantas. Members of the executive management team often do not have a finance background, so your results will have to be supported by clear explanations of the methods applied, how all metrics were computed, and what choices were made in these computations and why. A concise, and visually appealing report is essential for business communication. The report should contain:

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  • Clever designed graphs and simple tables that illustrate the key findings and statistics of the report. (To support the executives that have too little time to read the whole report, and just quickly browse.)
  • A professional and well-designed layout.
  • All sections of the report should contain informative headers and sub-headings, graphs and tables are labelled and numbered, the pages are numbered.
  • Executive summary, introduction, and conclusion.
  • Complete referencing to any external sources throughout the report.

Marking criteria

A marking rubric is provided on Canvas.

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