25300 Fundamentals of Business Finance

25300 Fundamentals of Business Finance – Group Assignment
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# Assignment instructions
Please read the following information carefully:
1) Due date and time: Monday 8 October 2018 11:00am.
2) Weight: 20% of total grade.
3) Team formation:

a team has a ‘free-rider’. Therefore, you should give considerable thought into
selecting team members.
4) Preformatted blank excel spreadsheet:
 You must record your answers in the provided blank excel spreadsheet (available on
UTS Online). This spreadsheet is protected which means that only a restricted number
of cells can be used. All of your inputs into the spreadsheet should be using Arial font
and size 8 text, this ensures that your inputs are not converted to ######. Your
answers will be converted to ###### if your cash flow/value is greater than
9,999,999,999 (Hint: none of your cash flows/values for Q1-4 in your solution should
be that large). The cells you cannot use are coloured grey. This preformatted
spreadsheet is designed so that it will print on one double-sided A4 page, this is done
to speed up the marking process allowing us to provide you with faster feedback.
 For Q1 to 3 enter the cash flow description and the dollar amount in the appropriate
cells. Use whole dollars only and ignore cents. There are more rows than are required
so if you’ve used all of the rows then it means you’ve got too many cash flow items.
Please do not group cash flows into the same cell. We want to be able to easily identify
each cash flow. Here is an example of how to report cash flows over the life of the
project:

the team leader and supply their tutorial details in the corresponding fields of the
spreadsheet. Marked spreadsheets will be returned in the nominated tutorial only.
25300 Fundamentals of Business Finance – Group Assignment
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# Assignment instructions:
5) Submission:
 Please save your spreadsheet file with its original “.xlsx” extension. Do not save the
spreadsheet in any other format other than “.xlsx” as we are unable to open nonEXCEL file extensions from UTS Online. Users of Apple’s Numbers spreadsheet or other
programs – you have been warned.
You must submit your assignment by:
 1) Submitting your team’s answer spreadsheet using the “Assignments” feature
available under the Assignments folder on UTS Online. To submit, click on “Assignment
submission”, click on “Browse My Computer” to open and attach your spreadsheet
and then click the “Submit” button, that’s it! Check your gradebook (“Tools” -> “My
Grades”) to verify that your spreadsheet has been submitted correctly. The date and
time will be displayed along with an exclamation mark (!). If you have a padlock symbol
it means you did not correctly submit your spreadsheet, so please try again. This
information only appears in the gradebook of the student who submitted the
spreadsheet. Please note we will only consider the first electronic submission that
you make, therefore, make sure it is your final submission.
AND,
 2) Submitting a printed copy of your team’s answer spreadsheet in the nominated
Assignment box “FINANCE 2” on level 5 of Building 8 of the Dr Chau Chak Wing
Building (next to the lift lobby). If you would like to submit your assignment early, or
whilst you are at UTS for FBF classes, the assignment box will be open from 3 October
2018. You must print your assignment as one A4 page with double sided printing. A
map detailing the assignment box location is available under the Assignments folder
on UTS Online. All team members must provide their signature in the space provided
on the spreadsheet on the printed copy of your assignment only (your signature is
not required for the online submission).
6) Assignment queries:

refer to the paragraph number in the assignment details below when asking a query
on UTS Online. We will not provide direct “yes/no” answers to your queries.
 Please read the existing posts on the discussion board before posting your query as it
is likely to have been answered already (especially when we approach the submission
date). In addition, please check the discussion board as we will clarify any perceived
ambiguities in the assignment questions. It is not a sufficient excuse to ex-post make
a complaint about the assignment because you have not been pro-active in seeking
clarification via the discussion board. Of course we greatly encourage your queries!
25300 Fundamentals of Business Finance – Group Assignment
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# Assignment instructions:
7) You will receive a zero mark for the assignment if any of the following apply to your
team’s submission:

It is every team member’s responsibility to ensure that the assignment meets such
requirements. Please contact the subject coordinator to discuss exceptional circumstances
that may arise.
8) Statement on plagiarism:

assignment submission is plagiarism-free. Please note that even if one member of the
team demonstrates plagiarism (without the knowledge of the other team members),
this will lead to problems for all team members. You do not want to be responsible for
causing issues to your team members.
 Last semester several teams were caught for plagiarism. All of these students did not
think they would be caught and they seriously regret their actions. The students from
all of the teams (guilty and non-guilty) are still awaiting their results which is affecting
their ability to enrol in subsequent subjects. Some examples of penalties for plagiarism
include: sanctions, having to redo the subject, and fees incurred to retake the subject.
I don’t want to come across as the bad guy but you have been warned.
25300 Fundamentals of Business Finance – Group Assignment
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Assignment information:
Your team must answer the following five questions. Questions 1 to 4 require information
relating to the capital budgeting decision of the QANTA Dreamflyer planes. Question 5
(detailed below on page 9) is a time value of money (TVM) problem for QANTA, this
question is unrelated to QANTA’s Dreamflyer planes capital budgeting decision.
Capital Budgeting Information (17 Marks)
Present an itemised breakdown (and the total) for each of the following:
Q1. The cash flows at the start.
Q2. The cash flows over the life.
Q3. The cash flows at the end.
Q4. The NPV of the Dreamflyer planes and a short explanation of your recommendation.
Congratulations, you were hired as a financial analyst for QANTA following your studies at
the University of Technology Sydney. QANTA is the national carrier of Australia. You fought
off tough competition for the job, the recruitment team selected you for your personable
character, analytical mind, ability to solve problems, and experience of working well in teams.
You have really impressed senior management with your finance knowledge and ability to get
the job done. As a result, the Chief Financial Officer (CFO) Lionel Messi has asked you to
perform a capital budgeting analysis of new Dreamflyer planes. The Dreamflyer planes will be
the first planes capable of flying from Sydney to London non-stop. QANTA are only
considering introducing the Dreamflyer planes for the Sydney to London route. In order to
conduct your analysis you will need to collect information from different departments of the
firm. The information that you have collected is detailed in the numbered paragraphs below
(figures are in AUD). It is your job as a financial analyst to decipher which information is
relevant to the capital budgeting analysis. Upon completion, you will present your analysis to
the Board of Directors who will approve/decline investment in the new planes.
Information gathered from various departments:
1. Five years ago QANTA paid $50,000 to Beckham & Co consultants to investigate demand
for the Dreamflyer planes. The highlights from the report suggest that there is high demand for
a non-stop service from Sydney to London (in particular for business travellers) and during the
European spring and summer seasons. In addition, survey respondents indicated that reduced
travel time and increased comfort would be a very attractive feature of the Dreamflyer planes,
especially for a non-stop flight.
25300 Fundamentals of Business Finance – Group Assignment
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2. Based on such analysis, four years ago QANTA paid $50 million to Boeiing (a world leader
in plane manufacturing) to develop the Dreamflyer plane. The Chief Executive Officer (CEO)
of QANTA Diego Maradona travelled to Boeiing headquarters in Chicago to negotiate this
deal. Christina Ronaldo (from the Accounting department) provides you with Diego’s travel
receipts for the Chicago trip which total $15,000. Christina suggests that the travel receipts be
immediately recorded as an opportunity cost for the Dreamflyer project. The Dreamflyer plane
will be the first to be able to fly non-stop distances of over 15,000 kilometers. Boeiing have
developed the Dreamflyer plane to be more fuel efficient resulting in a total flight time of 18
hours from Sydney to London (typically this route would take approximately 24 hours
including a fuel stop in Perth or Dubai). In addition to make the flight more comfortable,
Boeiing have increased the length, width and reclining ability of each economy class seat. The
Dreamflyer will also feature the largest number of business seats on a single plane. As a result
of QANTA’s $50 million fee to Boeiing, QANTA will have exclusive rights to the use of
Dreamflyer planes for the first two years of operation. This two-year period also provides
Boeiing with an opportunity to see how the Dreamflyer performs before selling Dreamflyer
style planes to other companies.
3. To ensure daily flights from Sydney->London and London->Sydney and to account for the
time difference between London and Sydney, QANTA will have three Dreamflyer planes in
operation. The Dreamflyer planes will be purchased today for a total capital cost of $300
million each. To save some money this capital cost figure excludes the cost of the plane
elevators and the plane rudders (as QANTA has three spare idle rudders on hand). QANTA
will fund the purchase of the new planes using a 60%/40% split between debt and cash
respectively, and will obtain access to debt from the Commonwealth Bank. Due to the
uniqueness of the Dreamflyer planes, Christina suggests that the new planes should be
depreciated over a 40-year life, rather than a 30-year life which is used for management
reporting purposes. Christina also indicates that the principal and interest repayments on the
ten-year amortising loan will total $65 million per annum.
4. In order to save some money QANTA have decided to purchase three plane elevators from
Airbuus (another plane manufacturer) for $5 million each. Airbuus granted QANTA a
discounted price on these elevators as a reward for previously being a long-term customer. The
plane elevators are compatible with the Dreamflyer planes. The plane elevator allows the plane
to change its altitude in the air. One plane elevator is required for each Dreamflyer plane.
Airbuus believe that each elevator should not need replacing for at least 15 years.
5. In order to take advantage of the Dreamflyer’s exclusivity to QANTA, QANTA will promote
the new planes by spending $20 million immediately and also at the end of year 1 on its
advertising campaign. This campaign will involve celebrity endorsed print and media adverts
featuring Hugh Jackman, John Travolta and Kylie Minogue, marketing during the Ashes
cricket series between Australia and England, and sponsorship of English Premier League side
Liverpool Football Club. Following on, advertising for the Dreamflyer planes will total $5
million annually. To partially fund these advertising expenses, whilst the Dreamflyer planes
are in operation, Lionel and Diego decide to reduce the total annual advertising expenses
associated with QANTA’s existing fleet from $502 million to $500 million beginning at the
end of year 1.
25300 Fundamentals of Business Finance – Group Assignment
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6. The sales team forecast that the Dreamflyer planes will generate combined yearly sales of
$1,000 million (based on a 100% passenger fill rate) during the first two years of operation. As
Boeiing will begin to sell Dreamflyer planes to QANTA’s competitors (e.g., Singa Airlines
and Etihad Air) resulting in increased price and service competition, it is anticipated that annual
sales will fall by $250 million to $750 million (based on a 100% passenger fill rate) following
year 2. Based on historical data and accounting for seasonal patterns it is expected that the
average passenger fill rate for all of QANTA’s planes is 80% during the entire length of the
Dreamflyer project. The introduction of the Dreamflyer planes will also result in a
cannibalisation of passenger fill-rates for QANTA’s existing routes, in particular the Sydney-
>Perth->London and Sydney->Dubai->London routes. The reduced passenger fill-rates on
such routes amounts to 20% of the total annual sales figures generated from all of the
Dreamflyer planes (based on an 80% fill rate). Pele from sales tells you that lost sales on
QANTA’s existing routes is irrelevant in the capital budgeting decision of the new Dreamflyer
planes.
7. Whilst the Dreamflyer planes are refuelling minor maintenance checks will take place. The
minor maintenance checks will cost a combined total of $2.80 million p.a. and ensure the planes
are fit to fly, regular checks also preserve the value of the planes. QANTA must also increase
its total spare parts inventory by $20 million from existing levels immediately to operate the
Dreamflyer planes, the cost of replenishing spare parts is included in the annual minor
maintenance cost figure.
8. Fuel expenses are an important consideration for QANTA. The Dreamflyer planes will be
lighter than existing long-haul planes due to increased use of carbon fibre (rather than
aluminium) to create the plane shell, fewer economy seats, and a new engine and aerodynamic
structure which more efficiently use fuel. The Dreamflyer planes are expected to increase the
total annual jet turbine fuel A costs for QANTA from $2,800 million to $3,000 million in year
1. Due to depleting resources globally, the cost of jet turbine fuel A is expected to increase by
2% every following year.
9. For each Dreamflyer plane and based on current rates, the salary of the pilots, flight crew,
maintenance crew, ground staff and baggage handlers totals to $5.80 million per annum.
Following the end of year 2, it is forecasted that to avoid staff going on strike and thus causing
significant disruptions to the Dreamflyer’s routes, a 5% pay increase to all of the Dreamflyer’s
staff members will be required. Following on, further changes in salary are not expected.
10. Another significant operational expense is payment for navigational services from airtraffic control, and airport taxes at London Heathrow and Sydney Kingsford Smith airports.
These operational expenses total $45 million p.a. for three of QANTA’s existing A380 planes,
the accounting team forecast the same expenses for the three Dreamflyer planes.
11. Several years ago in a drastic shakeup of its operational structure QANTA now obtain their
food and drinks externally from Gate’s Gourmet Airline Catering. Two weeks ago QANTA
reported in their annual report that food and drink expenses totalled $1,000 million across all
of its existing planes. It is anticipated that each Dreamflyer plane will require $4 million of
food and drink annually. The introduction of the Dreamflyer planes marginally increases the
bulk buying capacity of QANTA, resulting in total food and drink costs of $1,010 million p.a.
across all planes (this figure includes food and drink costs for all of the Dreamflyer planes).
25300 Fundamentals of Business Finance – Group Assignment
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12. QANTA will need to take out additional comprehensive insurance for the new planes
costing a total of $8 million per annum to cover itself against potential injury to staff and
customers, as well as damage to property. This insurance policy covers all three Dreamflyer
planes. QANTA headquarters is currently situated in International Tower 1 Barangaroo
operating at a cost of $5 million per annum. Diego suggests that if the Dreamflyer project is
implemented then it is allocated an equal share of the QANTA headquarter operating costs,
which is currently equally split between its entire fleet of 300 planes.
13. You receive an email from Pele titled “Financial details of three idle plane rudders.” The
plane rudder is required to allow the plane to change horizontal direction in the air and is
required for the operation of the Dreamflyer planes. The three rudders could be sold today for
a combined total of $2 million, were purchased previously for a total of $5 million and have
been written off for tax purposes. These rudders will be worthless by the conclusion of the
Dreamflyer project.
14. To save weight the Dreamflyer planes have a non-standard cockpit design and an original
set of flight controls. As a result, QANTA will need to immediately train 15 pilots to fly the
Dreamflyer planes. It will cost $50,000 to train each pilot.
15. Due to innovations in the aviation industry, QANTA predict that Boeiing will have
developed new and improved planes in the future, as a result QANTA plan to sell their
Dreamflyer planes in ten years’ time. Each Dreamflyer plane will also be required to undergo
major maintenance every three years. These maintenance costs are tax deductible. The first
major maintenance check occurs at the end of year 3. The cost of each major maintenance
check is $2 million per plane and these checks help to preserve the value of the Dreamflyer
planes. Christina thinks QANTA should spread the cost of the major maintenance checks over
a three-year period. During the maintenance checks the Dreamflyer planes will be out of action
for one month. If the Dreamflyer planes are out of action for one month QANTA expect annual
sales, food and drink expenses, and fuel expenses of the Dreamflyer planes to fall. After
negotiations with Boeiing and to ensure that QANTA does not lose sales revenue whilst the
Dreamflyer planes are out of action, Boeiing will lease three equivalent Dreamflyer planes
(“Comfortline” planes) to QANTA at a combined rate of $4 million per month. Diego decides
to lease the three Comfortline planes from Boeiing, whilst the Dreamflyer planes are out of
action.
16. Five years ago Ansett Australia (a major competitor of QANTA) went bust. As a result,
QANTA purchased two hangars at Sydney airport and office space in Alexandria for a
combined fee of $2 million from Ansett. The purchase price of $2 million is a heavily
discounted price for these assets. Each hanger can hold two planes equivalent to the size of two
Dreamflyer planes and will be used to conduct the minor maintenance and major maintenance
checks of the Dreamflyer planes. Competitor planes associated with the Star Alliance currently
lease QANTA’s hangars for $1 million per year for each hangar. QANTA only need 75% of
the space provided by both hangars for the operation of the three Dreamflyer planes, QANTA
will continue to allow Star Alliance to lease the remaining hangar space. In addition, the office
space in Alexandria is currently being rented out to Singa Airlines for $50,000 p.a. This office
space has annual utility expenses of $20,000 (which QANTA are currently paying). QANTA
will require this office space for administration and call centre requirements associated with
the Dreamflyer planes. The salary expenses for the administration and call centre staff is
expected to total $300,000 p.a.
25300 Fundamentals of Business Finance – Group Assignment
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17. Tim Cahill, a representative from the Australian Tax Office (ATO) informs you that each
Dreamflyer plane has an effective life of 20 years according to taxation ruling 2017/2
“Aeroplanes”. In addition, the useful life of the plane elevator is five years and the plane rudder
has a depreciation rate of 20% p.a. All operating expenses are tax deductible in the year the
expense is incurred and the tax rate is 30%.
18. The International Air Transport Association (IATA) estimate the following asset market
values in ten years’ time:

19. Due to the risk of the new planes you estimate that the required return for the Dreamflyer
project is 14%, this is consistent with estimates from QANTA’s accounting team, Beckham &
Co consultants and the Commonwealth Bank.
25300 Fundamentals of Business Finance – Group Assignment
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TVM Information (3 Marks)
Q5. As well as flights, QANTA also offers insurance against natural disasters. The Qatari
government decides to obtain insurance from QANTA to protect their 2022 World Cup
football stadiums from damage caused by an earthquake. If an earthquake were to occur
this would cause billions of dollars of damage to the football stadiums. In order to ensure
that QANTA can afford to cover the cost of damage from an earthquake, QANTA issues a
catastrophe debt security to investors with the following terms:

Assume that today is July 31 2018 (initiation date). Also assume the following payments are
made by QANTA:

Based on the information about the debt security and QANTA repayments your job is to
determine the outstanding value of the catastrophe debt security on the maturity date.
Please report your answer and all workings in the appropriate cells allocated to Q5. Your
working should be equivalent to the workings you would show in an exam. An example is
detailed below:
You do not need all of the space provided to show your answer. Please report your final
answer next to the cell marked “Outstanding value of debt”. Hint: you do not need to create
an amortisation schedule to solve this question.

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