Assignment on Quantas Memorandum

QUANTAS MEMORANDUM
TO: Olivia Worth, Executive of Government and Corporate Affairs, Qantas Airlines
FROM: Michael Smith, Communications Strategist
DATE: May 5, 2017
SUBJECT: Business Case Analysis
The Goal Coast City Council has addressed that there is a need of transport in the future
and for this they have created a strategy named The Gold Coast City Transport Strategy. This
strategy is concerned with reducing the traffic congestion as well as looking out for travelling
alternatives which are environmental friendly.
The traffic congestion has been increased in the Gold Coast due to continuous increase of
the population and the main objective of this strategy is to promote the use of public transport
and introduce other environmental friendly ways of transportation like walking and cycling.
Initially there no mention of the water transport and therefore, for this purpose the proposal has
been extended to introduce the system of ferry which will operate simultaneously with the land
transport.
This part of the memorandum discusses about the financial aspects of the project along
with the investment needs. The discussion has been done with the help of the investment
appraisal techniques. These techniques are discussed below-
NPV- The difference between the present value of the cash inflow and the present value of the
cash outflow has been termed as the net present value. The use of NPV is found in capital
budgeting as well as investment planning as it helps in the analysis of the profitability of an

investment or a project. A positive net present value shows that the earnings of the project
exceeds the anticipated costs.
IRR- The rate of interest at which the NPV of any investment or project becomes zero has been
termed as the internal rate of return. It helps in the evaluation of the attractiveness of the project
or the investment. Ideally, the IRR should be less than the required rate of return.
PI- The profitability index is the value or profit investment ratio which helps to describe the
relationship between the costs and the benefits of the suggested project with the help of the ratio
of present value of future cash flows: initial investment. It works as an index for quantifying the
value of each unit of investment.
Payback period- The payback period is the period of time which an investment requires to reach
to the breakeven point. The payback period evaluates the desirability of a project or investment.
Discounted payback period- The discounted payback period helps in the determination of the
profitability of the project. It is a procedure of capital budgeting which helps in the evaluation of
the feasibility and profitability of a project.
It has been assumed that an initial investment of $10 million is required in the ferry
project for the purpose of generating an annual revenue of $15 million. The expected growth rate
has been assumed as 5% growth in the revenue. Alternatively, it has been found that the variable
cost will be amounted to $8 million with a growth rate of 4% on the annual variable costs. The
weighted average cost of capital of 7% has been considered as a discounting rate and a tax rate of
25% has been applied on the income. The following calculation has been performed after
applying the appraisal techniques.

From the above calculation it has been observed that the project will be generating a
positive cash flow over the total life cycle of the project which is 7 years. However, it can be
assumed that if the free cash flows which have been generated by the project have been
discounted with the discounted factor of 7% then the free cash flow is capable of recovering the
initial investment of the project within a lifespan of 4 years. Therefore, the following result can
be arrived after making an evaluation of the project-
The sum of the discounted cash flows has been generated during the 7 years of the project
is the net present value of the project which has been calculated as $9.25 million. Therefore, the
project is feasible since it has a positive NPV and the project of constructing and maintaining of
ferry should be accepted. Another important appraisal technique of investment is the internal rate
of return and the IRR has been calculated as 27% and since it is greater than the weighted
average cost of capital therefore the project should be accepted. The overall life of the project
has been calculated as 7 years and the initial investment should be recovered within these 7