Question

Charlie Brown is thinking about starting Wing-It Airlines to fly a commuter route in and out of a major city. Four planes are on the market that will do the job, but each has different flight, load, and operating characteristics. Charlie is unsure of the demand for his service, and feels that it may depend to some extent on the type of plane chosen. Whether or not the business is feasible may depend on which airplane is used in conjunction with the demand estimate assumed. Are capital budgeting techniques appropriate for analysis of this problem? If so, is the issue a stand-alone or mutually exclusive decision?

Answer 1

I would be trying to advocate that capital budgeting decision should be specifically made for each of the plane and they should not be made in collectively because capital budgeting decisions will be those decisions which will be relating to allocation of the capital resources as well as they will also be demanding the appropriate structuring of the capital and since it is given that the demand is different on different routes than the aeroplanes has to be differently capital budgeted in order to get in line with the changing demand of the market and it will be helpful in order to calculate the various decision making techniques.

I will be trying to create the projects as independent products and I will be trying to make a standalone decision for each of the aeroplanes and I will not be trying to go for mutually exclusive decision because there is a difference in the demand and supply of different routes and hence it cannot be valued collectively and we should be trying to value them separately by the adoption of appropriate and capital budgeting mechanism in order to help these companies to establish the better capital budgeting techniques so I would always be trying to go for a stand alone principle of capital budgeting mechanism which will be advocating that the projects will be specifically valued rather than mutually exclusive decision in which they will be valued in accordance with the other aeroplanes as well so I would be trying to go for standalone technique of capital budgeting which will be helping me in order to get a better idea about the demand and the supply of various routes and sustainability of the profits on different routes.