QANTA Finance: Capital Budgeting and Debt Valuation Analysis

This report analyzes the financial feasibility of QANTA's proposed project involving non-stop flights from Sydney to London, utilizing capital budgeting techniques. It details the cash flows at initiation, during the project's life, and at termination, ultimately deriving the net present value (NPV) to determine project viability. The analysis considers various factors like advertising costs, sales of tickets, operational expenses, depreciation, and tax implications. Additionally, the report calculates the closing value of debt undertaken by QANTA to provide insurance cover, considering interest rates and repayment schedules. The findings indicate a positive NPV, suggesting the project's feasibility, and a remaining debt of $3780 million AUD.

FUNDAMENTALS OF BUSINESS FINANCE-GROUP ASSIGNMENT
Executive Summary
The report deal with two situation i.e Feasibility of proposed project in hand on the basis of capital
budgeting and deriving the closing value of debt taken to provide insurance cover to Qatari
government.
On the detailed analysis, it is undertook that project is feasible and has positive net present value
and the closing value of debt stands at $ Mio 3780.
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Table of Content
Contents
Executive Summary...............................................................................................................................1
Introduction...........................................................................................................................................3
Purpose of Report.................................................................................................................................3
Assumptions..........................................................................................................................................3
Analysis..................................................................................................................................................3
Cash flow at Initiation........................................................................................................................3
Cash Flow during life.........................................................................................................................5
Cash flow on Termination of Project.................................................................................................6
Derivation of Net Present Value........................................................................................................6
Closing Value of debt.........................................................................................................................7
2

Introduction
QANTA has been exploring new business opportunities. In this regard, recently QANTA has come up
with a project whereby they shall be launching non-stop flying planes from Sydney to London in
association with Boeing who shall be making Dream Flyer planes who are capable to fly from Sydney
to London non-stop with one shot fuelling. QANTA has expended some money in this regard and has
obtained exclusive rights over the project i.e Dream Flyer planes for a tenure of 2 years from the
date of launch. Post 2 years Boeing shall make this new technology plane to competitors and the
exclusive rights shall lapse.
In the second half of the report analysis has been conducted with regard to closing value of debt/
loan taken by QANTA from the market for providing insurance cover.
Purpose of Report
The report has been written with dual purpose i.e. to carry out capital budgeting analysis of the
proposed project and to find out the closing value of debt undertaken by QANTA to provide
insurance to Qatari Government for their 2022 World Cup Football stadiums.
The report at the end details out whether to execute the project or not and the net present value of
project along with the value of debt outstanding that needs to be repaid.
Assumptions
The assumptions undertaken has been highlighted here-in-below:
(a) Fees paid to Beckham & Co consultant is sunk cost;
(b) Payment made to Boeing 5 years ago is relevant for analysis and has been taken at $50 Mio for
analysis without considering time value of money;
(c) Cost of Chicago Trip is sunk cost ;
(d) The debt and equity apportion is not relevant for analysis as the cost of project is given , hence
not considered for analysis;
(e) Treatment of asset in the books is not important as the depreciation charged by income tax
department is taken into consideration;
(f) Repayment of principal and interest is not considered for analysis as the same is already
embedded in cost of capital;
(g) Depreciation is a notional expense and used for computation of tax benefit;
(h) No depreciation on the shudder shall be charged.
(i) The tax rate has been considered @30%.
Analysis
Cash flow at Initiation
The cash outflow at the initiation of project has been detailed here-in-below:
Cash Flow at the initiation of Project
$ Mio
Sl No Particulars Amount
1 Advertising Cost 20
2 Increase in Inventory 20
3 Rudder Cost 1.4
3

Cash Flow at the initiation of Project
4 Training Cost 0.75
5 Fees Paid 50
6 Capital Cost 900
7 Cost of Elevator Purchased 15
8 Total 1007.15
On perusal of the above, it may be seen that the total outflow at the initial of the project stands at
AUD 1007.15 subject to the assumptions stated above. Further, the same has been considered as
incurred in Year 0 and the payment made in advance of AUD 500 has also been considered to have
been incurred in year 0.
4

Cash Flow during life
The cash flow during the life of the project has been detailed here-in-below:
Cash Flows over the life of the Project
$ Mio
Sl No Particulars Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
1 Cost of Advertising -5 -5 -5 -5 -5 -5 -5 -5 -5 -5
2 Reduction in Advertising Cost of the Group 2 2 2 2 2 2 2 2 2 2
3 Sales of tickets 800 800 600 600 600 600 600 600 600 600
4 Loss in other business -160 -160 -120 -120 -120 -120 -120 -120 -120 -120
5 Cost of Maintenance Check -2.8 -2.8 -2.8 -2.8 -2.8 -2.8 -2.8 -2.8 -2.8 -2.8
6 Fuel Cost -200 -204 -208 -212 -216 -221 -225 -230 -234 -239
7 Salary Expense -6 -6 -6 -6 -6 -6 -6 -6 -6 -6
8 Operational Expense -45 -45 -45 -45 -45 -45 -45 -45 -45 -45
9 Foods and Drink Expense -10 -10 -10 -10 -10 -10 -10 -10 -10 -10
10 Maintenance Check -6 -6 -6
11 Insurance -8 -8 -8 -8 -8 -8 -8 -8 -8 -8
12 Lease Cost -4 -4 -4
13 Lease Rent Forgone -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5
14 Administration Expense -0.33 -0.33 -0.33 -0.33 -0.33 -0.33 -0.33 -0.33 -0.33 -0.33
15 Depreciation of Plane -45 -45 -45 -45 -45 -45 -45 -45 -45 -45
16 Depreciation of Elevator -3 -3 -3 -3 -3
17 Tax -95 -94 -43 -42 -42 -40 -39 -39 -36 -35
18 Add Back : Depreciation on Plane 45 45 45 45 45 45 45 45 45 45
19 Depreciation of Elevator 3 3 3 3 3
20 Total 269 267 148 146 146 138 136 136 128 126
On perusal of the above, it shall be seen that the cash flow earned over the years have decreased in account of competition in the market. Further, it shall
be seen that cash flow over the 10 years have been positive. Tax rate has been taken @30% for the project. Depreciation is a notional cost and hence added
back.
5

Cash flow on Termination of Project
Cash Flow at the end of project
$ Mio
Sl No Particulars Amount
1 Sale Value of Dream Flyer Plane 420
2 Tax Saving on Dream Flyer 9
3 Sale Value of Elevator Net of Tax 2.1
4 Inventory reduction 20
5 Total 451.1
At termination of the project, the increase in working capital has been realised and any capital gain or loss and the corresponding tax on the same has been
considered. Accordingly, the Dream Flyer plane has been sold at capital loss and tax benefit on the same has been considered while Elevator has been sold
at profit and computed net of taxes.
Derivation of Net Present Value
Computation of Net Present Value of Dream Flyer Plane
$ Mio
Sl
No Particulars Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
1 Initial Outflow -1007.15
2 Cash inlfows over the life 269 267 148 146 146 138 136 136 128 126
3 Cash inlfows on conclusion 451.1
4 Total Cash Flows -1007.15 269 267 148 146 146 138 136 136 128 578
5 Discounting Factor 1
0.87719
3
0.76946
8
0.67497
2 0.59208
0.51936
9
0.45558
7
0.39963
7
0.35055
9
0.30750
8
0.26974
4
6 Present Value of Cash Flows -1007.15
236.367
5
205.185
4
99.6278
2
86.4969
4 75.7855
62.7742
2
54.3891
5
47.5859
4
39.4614
8
155.789
5
7
Net Present Value of Cash
Flows
56.31348
51
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On Perusal of the above, it shall be seen that the Net Present Value of the project is positive which is an indicator of proposed project being feasible and
shall be undertaken by the company. Further, Net Present Value has been derived by taking difference of present value of inflow less outflows.
Closing Value of debt (Question 5)
Time Value of Money
$ Mio
Sl No Particulars Amount
1 Amount of loan to be taken 10000
2 Rate of Interest (Australia Cash rate + 3.5%) 5%
3 Maturity of debt 48 Months
4 Future Value of Debt if no repayment is made 12208.95
5 Balance Outstanding on June 30 2019 10511.62
6 Repayment -250
7 Value outstanding 10261.62
8 Balance Outstanding on October 31 2021 4120.30
9 Balance Outstanding on January 31 2022 4172.01823
10 Repayment 500
11 Balance 3672.01823
12 Balance Outstanding on July 30 2022 3780.46685
On perusal of the above, it shall be seen that QANTA has repaid debt over various occasion like June, 2019 to October, 2021 and January, 2022. Post
repayment of such debt, it has been seen that debt outstanding is 3780 Million AUD. Further, it has been assumed that minimum payment of 1$ Mio has
been included in the payments made and every year repayment has been made as seen above.
In addition, it shall be worthwhile to note that the rate of interest under Australian cash rate is 1.5% and the rate used for computation in the aforesaid sum
is 5%. Besides above, the entire loan schedule has not been prepared in alignment with the requirement of the question.
The formula used includes:
Future Value= Present Value multiplied by ( 1+ rate of interest / 12) ^ Time.
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