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.
- 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
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
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
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 )