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The controller of the Front Range Airways is considering the addition of a new on - site maintenance facility at its main airport of Centennial

The controller of the Front Range Airways is considering the addition of a new on-site maintenance facility at
its main airport of Centennial Airport. The addition will has two primary benefits: to eliminate its reliance on
the maintenance of its fleet by outside contractors and create the opportunity to sell its maintenance program
to other commuter airlines. The new maintenance facility will allow the Front Range Airways not only to
reduce its operating costs but also to increase its revenue. The new on-site maintenance program is expected
to reduce the fleet's downtime by 1 day which allows the Front Range Airlines to schedule more flights. The
question for the controller is whether these expected benefits were enough to justify the $24 million capital
outlay plus the incremental investment in working capital over the six-year life of the project.
Construction will start in January 2024. $22 million of the capital outlay will be spent in 2024 and the
remaining $2 million will be used in 2025. When the new on-sire maintenance facility begins operating in
2025, it is expected to significantly reduce the operating costs of the airline. These operating savings will
come mainly from the difference between the cost of self-maintenance and the cost of buying maintenance
contract from the open market. The controller's estimate shows that the operating savings will be $2 million
for 2025 and $2.5 million per year for the following five years.
The controller also plans to take advantage of reduced fleet downtime to schedule more flights to
create additional revenue. For 2025, she expects to show additional $4 million revenue from its increased
utilization of the airline's fleet. She expects the additional revenue to top at $10 million in 2026 and continue
to stay at that level through 2030. It is estimated that the cost of goods sold (mainly fuel) will be 68% of
revenue, and SG&A will be 5% of revenue.
In addition to the capital outlay of $24 million, this project will require the Front Range Airways to
invest in increased level of inventories and accounts receivable. No changes in current liabilities are expected
from this project. The total net working capital is expected to average 10% of annual revenue. This means
that the amount of net working capital investment each year will equal 10% of incremental revenue for the
year. At the end of the life of the project in 2030, all the net working capital on the books will be recoverable
at cost. The salvage value of the capital outlay is expected to be zero. Tax rate would be 21%, and the capital
outlay of $24 million will be depreciated under straight-line schedule, starting 2025.
The firm's long-term bond is rated as Baa as of today. The firm's stock beta is 1.25. Other financial
information is provided in the Exhibits below.
Should this company accept this project?
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