Malaysian Airlines Bhd (MAS) is considering a proposal to buy two new passenger aircrafts in order to

increase their service capacity. The aircrafts that are being considered are from model Airbus MH370. The

price for each aircraft is RM279, 000,000. Generally, it takes two years for Airbus to construct each MH370

aircraft ordered.

The buying process requires MAS to pay down payment, which is 35% of the total aircraft price upon placing

the order. The remaining 65% will be paid once the construction process has completed, before the delivery

could take place. This is scheduled to be two years from the date where the order is placed. Below is the general

information for one Airbus MH370 aircraft:

MAS Airlines Bhd.

Accounting & Financial Department

Aircraft Model Airbus MH370

COSTS TOTAL AMOUNT REMARKS

Maintenance cost RM5,760,000 per year

All costs are projected to

increase by 2% per annum

throughout the projects

life.

Salary:

Pilot

Air crews

RM240,000 per year

RM240,000 per year

Fuel cost RM16,000,000 per year

Insurance RM9,600,000 per year

Aircrafts will be depreciated using simplified straight line depreciation method down to zero.

Each aircraft has 10 years economic life.Semester A201

Each aircraft is expected to be able to increase MASs revenues by RM72, 900,000 during the first year of its

operation. The revenue then is projected to increase by 4% per annum throughout the projects life. Since the

aircrafts is the latest model in its class, the company will need to train their pilots and air crews on the aircrafts

operational aspect. The training which will cost the company RM250, 000 will be conducted in Airbus Training

Facility in France only if the aircrafts are purchased.

MAS will finance RM300, 000,000 from the total aircraft price through a loan from one of the local banks at

8.4% per annum. At the end of the projects life, each of the aircrafts is expected to be sold as used aircraft at

prices tabulated as below:

Probabilities Aircraft Price (RM)

0.20

0.30

0.35

0.15

218,000,240

219,000,420

218,240,240

219,840,460

Two months ago, MAS hired Wong Business Consulting Services Sdn. Bhd. to advise them on the proposal to

buy the aircrafts. The consultation cost was RM44, 000 and had already being paid. If the two aircrafts are

purchased, MAS will need to rent two hangars owned by Malaysia Airport Bhd. (MAB) for the purpose of

aircraft maintenance and repairs. The rental costs for each hangar is RM200, 000 a year. The hangar rental costs

will be revised every two years. Based on the discussions with MAB, the hangar rental costs are likely to

increase by 2% every time the revision is made.

The corporate tax rate is 24% while the companys required rate of return is 14%.

A. Based on the information given,

(i) calculate the projects total initial outlay.

(ii) calculate the annual project cash flows.

(iii) calculate the projects terminal cash flow.

(iv) how terminal value growth assumptions affect a projects overall value with the interactive tool:

What is your cost of capital?

B. Calculate net present value (NPV) and profitability index (PI) for the project.

C. Calculate the internal rate of return (IRR) for the project.

D. Should MAS proceed with the project? Explain your answer.

E. Assume there is a delay in the aircrafts construction process and the delivery could only take place after

three years (instead of two years) after the order is placed. Could this project still be a viable project for

MAS? Explain your answer.

F. Will Pandemic COVID-19 increase the Cost of Capital in the MAS Airlines Bhd and why? Explain by your

strategies.