Financial Management: Analysis of Expansion Project by Jet Airways

The aim of the assignment is to conduct a financial analysis on the expansion project that will be initiated by the Jet Airways Company. The analysis of the investment will be done after taking key expenses from the company in the trend period. The revenue of the company will be generated from the various customers that will be using the services provided by the Jet Airways for the Business Class Services.

Running head: FINANCIAL MANAGEMENT
Financial Management
Name of the Student:
Name of the University:
Author’s Note:

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Executive Summary
The aim of the assignment is to conduct a financial analysis on the expansion project that will be
initiated by the Jet Airways Company. The analysis of the investment will be done after taking
key expenses from the company in the trend period. The revenue of the company will be
generated from the various customers that will be using the services provided by the Jet Airways
for the Business Class Services. The revenue and expenses of the company has been taken at an
increasing trend of about 10% per year. The net profit of the project was derived after adding up
all the sources of income that will be generated by the company and key expenses that will be
incurred on a yearly basis by the company. The depreciation being non-cash expenses was added
back to the net profit of the company. Investment Appraisal tools like Net Present Value, Internal
Rate of Return and Payback period was applied for assessing the financial viability of the
project. The profitability and the return generated by the expansion project was considered to be
viable as the acceptance of the project will increase the wealth of the stakeholders of the
company.

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Capital Budgeting........................................................................................................................3
Net Present Value........................................................................................................................5
Internal Rate of Return................................................................................................................5
Payback Period and Discounted Payback Period........................................................................6
Recommendation.............................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9
Appendix........................................................................................................................................11

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Introduction
Evaluation of Capital Budgeting Project from the perspective of Jet Airways Company
for the expansion of the various products and services of the company. Expansion of the services
of the Airways Company in the form of providing Business Class Services to the consumers is
the plan presented. The company will be incurring fixed costs in the form of purchase of
equipment’s or assets for the company as well as direct operational expenses for the operations
of the company. Financial Sustainability and viability of a project plays a crucial role in the long-
term so that the company is able to create wealth for the shareholders of the company (Rossi
2015). The viability of the expansion project was done by analysing the same with the use of Net
Present Value, Internal Rate of Return and Payback Period. Various factors and conditions needs
to be taken into consideration while analysing the viability and sustainability of the project.
Expansion of the business services in the form of increasing the products and services provided
by the Jet Airways will be taken into account depending on the profitability and sustainability of
the project (Burns and Walker 2015).
Discussion
Capital Budgeting
The investment assessment tools will be applied by the company for assessing the
sustainability will be the NPV, IRR and Payback Period that will be guiding the company on the
fact of accepting or rejecting a project. The Capital Budgeting will help the company whether the
initial invested capital is generating significant returns for the company (Rossi 2014).
The revenue of the company was said to be primarily contributed from the business class
services that the company will be providing. The customer base of the company was taken at

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2100 customers per annum who will be paying a sum of RM 3100 for the business class services.
The revenue of the company in the first initial year for the company will be around RM6.51mn.
The revenue base of the company is expected to increase for the company implying that the
demand for the services of the company is expected to increase in the trend period analysed for
the company. The expenses of the company is expected to also increase by about 10% for the
company (Andor, Mohanty and Toth 2015). The key expenses that the company will be incurring
is the maintenance cost on crew, maintenance materials, refreshment benefits, cabin crew costs,
overhead expenses and depreciation rate. The initial investment for the purchase of the
equipment’s of the company will be depreciated over a five year of useful life of the asset. It has
been assumed that the asset would not be having any salvage value at the end of the investment
project. Depreciation is a non-cash expenses which was shown in the account for showing that
the company would be getting a tax benefit from the same (Sari and Kahraman 2015). The
taxation rate at which the profits of the investment project will be charged will be the 25% tax
rate. The profit generated from the project in each of the following year was taken into
consideration for the purpose of the analysis of the company. Business factors and macro-
economic factors like interest rate, level of inflation rate, various government policies that may
significantly influence the operations of the company has been well taken into consideration
while analysing the investment project of the company. The expenses of the company for the
various operational and management work has been taken at an increasing rate of about 10% per
year for the company. The market research cost that has been incurred by the company
amounting RM 250,000 will be treated as a sunk cost and will not be added in the overall
expenses of the company. The nature and characteristics of the sunk cost of the company is the
cost that is already incurred and cannot be recovered thus the same has not been included in the

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analysis of the expansion project. The applicable discount rate that was applied for the evaluation
of the profitability of the project would be 12% showing the minimum required return by the
project for the capital investment and the risk it would be taking (de Andrés, de Fuente and San
Martín 2015). The overhead expenses taken by the company was around 50% of the given
amount as the amount given represents existing fixed cost, which is related to an existing
company fixed cost. For the purpose of the evaluation of the net present value and viability of the
company, it is necessary for calculating the correct overhead expenses.
Net Present Value
The net present value of the investment project shows the overall profitability of the
project after taking all the cash inflows and outflows of the company. The net present value of
the company takes the discount rate as the key factor into analysis of the profitability of the
project. The net present value of the project shows exactly the amount by which the wealth of the
shareholders will be created from acceptance or rejection of a project. The net present value of
the expansion project was around RM 6.91 million (Daunfeldt and Hartwig 2014). The net
present value of the project shows that if Jet Airways goes ahead with the expansion project it
would be creating a wealth of the stakeholders of the company. The key benefit of applying the
net present value method will be it will be capturing all the cash flows irrespective of the timing
of the cash flows and pattern of cash flows. Both conventional and non-conventional cash flow
pattern gets reflected in the same. The result from the Net Present Value says that Jet Airways
should accept the expansion project as the demand for the new services will be taken by a wide
base of customers (Chittenden and Derregia 2015).

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Internal Rate of Return
The internal rate of return is a key metric tool that is applied in assessment of the capital
budgeting project reflecting the extent of profitability of project. The internal rate of return for
the project makes the net present value of a project equal to zero (El-Daour and Abu Shaaban
2014). It shows the attractiveness of the project in terms of the interest rates that will be in the
form of profit generation for the company. The internal rate of return for the project was around
32% for the expansion project showing that the company can earn the same from the investment.
The key benefit of applying the internal rate of return would be that it would allow the company
compare the return of the project with other option available for the company in terms of
expansion. The return from the project is displayed in a quantifiable percentage terms that can be
applied by the company for assessing the return or the level of profitability from the project
(Malenko 2018).
Time Cash Flows Discounted
Cash Flows
Year 0
(12,000,00
0)
(12,000,00
0)
Year 1
4,488,7
50
4,007,8
13
Year 2
4,877,6
25
3,888,4
13
Year 3
5,305,3
88
3,776,2
70
Year 4
5,775,9
26
3,670,7
06
Year 5
6,293,5
19
3,571,1
12
Net Present Value
6,914,3
12
Internal Rate of Return 32%

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Payback Period and Discounted Payback Period
The payback period shows the length or the time taken by the project for paying back the
initial investment amount. It show the recovery of the initial capital in the due course of the
project. The cash flows of the projects must be assessed in accordance with the various
requirement of the company financial plan and objectives so that it is well able to plan and
execute the operations of the company (Mendes-Da-Silva and Saito 2014). The payback period
would allow the company get an estimate about the timing of the cash flows of the project and
the time from which the profits of the project would start coming after the recovery of the initial
capital. The payback period for the project was around 2.49 years indicating that the recovery of
the initial investment would be done in the first 2.49 years and after that, the company would be
receiving profit from the project. The key limitation of the payback period could be considered
as the application of relevant discount rate in the scenario. The discounted payback period gives
a more realistic approach for the assessment of the cash flows from the project (Nurullah and
Kengatharan 2015). The discounted payback period for the company would take the 12%
discount rate by discounting the cash flows that will be flowing to the company so that the
company gets to know a more realistic approach for the cash flow pattern. The discounted
payback period for the project was around 3.09 years indicating that the company will be able to
receive the initial amount of capital in 3.09 years and later on the profits from the project would
start coming (Appendix 1). Based on the above analysis and the timing of the cash flows the
expansion project should be accepted by the company as the recovery of the initial investment of
capital will be done by the company at an early stage by the company (Rigopoulos 2015).

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Recommendation
Return and risk are some of the important factors in an investment project and the same
should be in accordance with the objectives and policies of the company. The return generated
by the project shows that the company should accept the project as the shareholders of the
company would be benefitted from the same (Schlegel, Frank and Britzelmaier 2016). The
business class service would allow the company serves premium class services to the customers
and in turn enjoy a wider revenue and customer’s base for the company. RM 6.91 million of net
profitability from the investment project and a return of 32% over the investment project is
something that the company will be getting from the investment project. The payback period for
the project was also sound for the company indicating that the project will be paying off the
initial invested capital in just 2.49 years of time. Thus on an overall basis after the assessment of
the key factors and various scenarios the project would be creating wealth for the company and it
should be accepted (Kengatharan 2016).
Conclusion
The financial analysis of the investment was done after taking key expenses from the
company in the trend period. The viability of the expansion project was done by analysing the
same with the use of Net Present Value, Internal Rate of Return and Payback Period. Capital
budgeting tools have given us a significant idea about the various factors and scenarios under
which the company will be operating. Expansion of the business services in the form of
increasing the products and services provided by the Jet Airways was evaluated for the company
where the key revenue and income was analysed for the company. The revenue and expenses of
the company has been taken at an increasing trend of about 10% per year. Business factors and
macro-economic factors that may significantly influence the operations of the company has been

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well taken into consideration while analysing the investment project of the company. The
applicable discount rate that was applied for the evaluation of the profitability of the project
would be 12% showing the minimum required return by the project for the capital investment
and the risk it would be taking. The profitability and the return generated by the expansion
project was considered to be viable as the acceptance of the project will increase the wealth of
the stakeholders of the company. The net present value of the project indicated that Jet Airways
goes ahead with the expansion project as it would be creating wealth of the stakeholders of the
company. The NPV of the project was RM 6.91 million, the IRR of the project was around 32%
and the payback period of the project was also 2.49 year. On an overall basis the
recommendation of expanding the business project was given to the company.

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References
Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Bierman Jr, H. and Smidt, S., 2014. Advanced capital budgeting: Refinements in the economic
analysis of investment projects. Routledge.
Burns, R. and Walker, J., 2015. Capital budgeting surveys: the future is now.
Chittenden, F. and Derregia, M., 2015. Uncertainty, irreversibility and the use of ‘rules of
thumb’in capital budgeting. The British Accounting Review, 47(3), pp.225-236.
Daunfeldt, S.O. and Hartwig, F., 2014. What determines the use of capital budgeting methods?:
Evidence from Swedish listed companies. Journal of Finance and Economics, 2(4), pp.101-112.
de Andrés, P., de Fuente, G. and San Martín, P., 2015. Capital budgeting practices in
Spain. BRQ Business Research Quarterly, 18(1), pp.37-56.
El-Daour, J.I. and Abu Shaaban, M., 2014. The use of capital budgeting techniques in evaluating
investment projects: An applied study on the Palestinian corporations working in Gaza
Strip. Journal of Al-Quds Open University, 333(2300), pp.1-85.
Kengatharan, L., 2016. Capital budgeting theory and practice: a review and agenda for future
research. Applied Economics and Finance, 3(2), pp.15-38.
Malenko, A., 2018. Optimal dynamic capital budgeting. Available at SSRN 1710884.
Mendes-Da-Silva, W. and Saito, R., 2014. Stock exchange listing induces sophistication of
capital budgeting. Revista de Administração de Empresas, 54(5), pp.560-574.

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Nurullah, M. and Kengatharan, L., 2015. Capital budgeting practices: evidence from Sri
Lanka. Journal of Advances in Management Research, 12(1), pp.55-82.
Rigopoulos, G., 2015. A review on Real Options utilization in Capital Budgeting
practice. International Journal of Information, Business and Management, 7(2), p.1.
Rossi, M., 2014. Capital budgeting in Europe: confronting theory with practice. International
Journal of Managerial and Financial Accounting, 6(4), pp.341-356.
Rossi, M., 2015. The use of capital budgeting techniques: an outlook from Italy. International
Journal of Management Practice, 8(1), pp.43-56.
Sari, I.U. and Kahraman, C., 2015. Interval type-2 fuzzy capital budgeting. International Journal
of Fuzzy Systems, 17(4), pp.635-646.
Schlegel, D., Frank, F. and Britzelmaier, B., 2016. Investment decisions and capital budgeting
practices in German manufacturing companies. International Journal of Business and
Globalisation, 16(1), pp.66-78.

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Appendix
1) Investment Assessment of Jet Airways.
Time Cash Flows Discounted Cash
Flows
Discounted
Payback
Period
Years
Year 0 (12,000,000) (12,000,000) (12,000,000) 0
Year 1 4,488,750 4,007,813 (7,992,188) 1
Year 2 4,877,625 3,888,413 (4,103,775) 2
Year 3 5,305,388 3,776,270 (327,505) 3
Year 4 5,775,926 3,670,706 3,343,201 0.089
Year 5 6,293,519 3,571,112
6,914,312
32%
Net Present Value
Internal Rate of Return
Disc. Payback
Period 3.09
2) Cash Flow Analysis
Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Initial Investment -12,000,000
Cash Inflows
Revenue 6,510,000 7,161,000 7,877,100 8,664,810 9,531,291
Inflation Forecast =3100*(1200+900) =C5*1.1 =D5*1.1 =E5*1.1 =F5*1.1
Expenses
Less: Refreshment Cost -475,000 -522,500 -574,750 -632,225 -695,448
Less: Maintenance Team Exp. -150,000 -165,000 -181,500 -199,650 -219,615
Less: Maintenance Materials -250,000 -275,000 -302,500 -332,750 -366,025
Less: Retrenchment Benefits -200,000 -220,000 -242,000 -266,200 -292,820
Less: Cabin Crew Cost -150,000 -165,000 -181,500 -199,650 -219,615
Less: Overhead Expenses -100,000 -110,000 -121,000 -133,100 -146,410
Less: Depreciation Rate -2,400,000 -2,400,000 -2,400,000 -2,400,000 -2,400,000
Total Expenses -3,725,000 -3,857,500 -4,003,250 -4,163,575 -4,339,933
Profit Before Tax 2,785,000 3,303,500 3,873,850 4,501,235 5,191,359
Less: Tax Rate@25% 696,250 825,875 968,463 1,125,309 1,297,840
Profit After Tax 2,088,750 2,477,625 2,905,388 3,375,926 3,893,519
Add: Depreciation 2,400,000 2,400,000 2,400,000 2,400,000 2,400,000
Net Cash Flows -12,000,000 4,488,750 4,877,625 5,305,388 5,775,926 6,293,519

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