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Southwest “Winglets” Case

Expected Future Cash Flow of Blended Winglet Project
The cash flow estimations for this project were based on assumptions gleaned from our engineering department, flight operations department, and facilities department. From our initial investment data, we assumed a winglet cost of $700,000 per aircraft, installation of $56,000 per aircraft, and an additional day of downtime for each aircraft at $5,000 per day. The total value of the winglet installation per aircraft was $761,000 which was depreciated over a 7-year modified MARCS depreciation schedule.

In addition to winglet installation, facility upgrade charges were deemed necessary by our Facilities Director. The final estimate for facilities modification was $1200 per aircraft. Installation of the winglets does not increase regular maintenance costs; however, the winglets do increase the possibility of incidental damages. The maintenance department estimated that these damages would cost $210,000 per plane, and that 1% of planes per year would require these repairs. On average, this translates to $2100 per aircraft.

Blended Winglet Project Expected Rate of Return
Our calculations indicate that the IRR for this project, for any of our anticipated fuel costs, will be significantly higher than the long-term WACC of 11.291% (see part 3, below). However, this calculation could be inaccurate due to the long-term nature of the project and the assumptions inherent in the IRR. The IRR calculation assumes that we will be able to continuously reinvest our earnings at the same rate of return over the entire lifetime of the project. Since this project will last for 20 years, it is difficult to estimate what the market rates of return will be over that time, and it is unlikely that they will be constant.

Discount Rate
We calculated the weighted average cost of capital (WACC) for…...

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