Question

Discussion Prompt:

Assume that you are the project manager at Textron Aviation (TXT). Textron Aviation products include corporate and business, personal, and military aircraft. For purposes of this discussion, you have knowledge that in recent years most of Textron Aviation’s military products have, where possible, been outfitted with Winglets. Further, the design of these wing components has evolved to make them more efficient and maximize the fuel savings they provide. Textron Aviation flight operations manager reports finding that the addition of Winglets to an existing aircraft offers fuel savings of approximately 3% of the gas bill, or 150,000 gallons of jet fuel per year (Aviation Partners, Inc., n.d.). At a cost of $1.06 per gallon (which for simplicity, we will assume to be stable), this is a significant source of cost-reduction which accrues to the end user over the useful life of an aircraft. While the useful life of the corporate craft is 30 years, Textron's research indicates that clients typically use a 10-year planning horizon, at most.

Tasks:

As Textron's production manager, you have been asked to offer an evaluation of the following:

If Textron chooses to discount these savings at a rate of 15% per year of useful life, considering only a 10 year planning horizon, what is the potential cost savings to the customer over the life of this plane? Evaluate the potential financial benefit to Textron of adding winglets to an existing corporate aircraft, if the cost to Textron of each winglet is $556,000 per craft, assuming that demand for corporate aircraft will allow Textron to increase the craft’s price by the full amount of the savings accruing to the customer (Aviation Partners Boeing, 2016).

The manager that originally brought this idea forward understood this addition of Winglets to represent a net increase in revenues of almost double of the price of the Winglet. As Textron's production manager, it is your opinion that this estimate may not encompass facts related to project production and financing. Using concepts covered in this and previous modules, analyze additional concepts that indicate other concerns that we might have in making this change, including the impact on other areas of financial policy. Calculate the rate of return that would make the net present value of this project equal to zero, and comment on its importance in terms of the impact of this project, through the diversion of existing resources, and on future growth and sustainability in the face of fluctuating revenues.

Answer 1

Part A

• Since saving is 150,000 gallons of fuel will be saved and cost per gallon is $1.06 so per year saving would be 159,000.
• These savings are in future value so in order to get saving in present value, we have to discount it with 15% (given)
• All future values are discounted and sum of all value comes out to be 797,984
• So potential cost saving will be 797,984 over the period of 10 years

Part B

the potential financial benefit to Textron of adding winglets

= Additional revenue they can charge ( total cost saving by user) - Cost of winglets

= 797,984 - 556,000

= 241,984

Part C)

Concerns we have to look for

• Resources that we will be using for this project is less valuable elsewhere ( means getting return lower than return from this project)
• We are getting the return of 26% but we are not considering other factors like whether production process will change the cost.
• Change of fuel price will impact the saving so will additional revenue due to winglet

Part D)

As of now our NPV is positive and it is

= 797,984 - 556,000 = 241,984

In order to make our NPV zero, we need to find the discount factor that makes NPV zero

So, in excel using goal seek it is found that df is 26%.

Goal seek: Set the value = 556,000 in E12 by changing B1to g the t discount rate.

Importance: Since the rate is higher than 15% means the

• project is viable and diversion of resources can be done from the project which has the lower return than 26%.
• Sustainability will be there even when revenue is dropped because we are getting higher return than minimum discount rate i.e. 15%
• Even when fuel price decrease is acceptable (up to 0.7385, using goal seek )