The scarcity ofresources creates a situation where organizations have to considerthe opportunity choice of making economic decisions. The airlinelacks the financial resources to acquire any aircraft it desires.Consequently, it has to choose either to purchase the Airbus A330-300or the Boeing B777-200. Both aircraft are impressive in structure,size, comfort, and reliability. Therefore, making a decision betweenthe two aircraft would involve much more than just physicalcharacteristics (Morrell, 2007, 22). Economic parameters have to beemployed in making such a financial decision. The ramifications ofmaking a wrong choice could be serious and long-term. It may eveninitiate an unprecedented phase of making losses.
Variousparameters can be used in making the decision. Payback periodstipulates the amount of time it would take the airline to recoverthe initial cost outlay (Gotze, 2015, 95). A330-300 would requirefour years and eight months so as to remit profit levels surmountableto the initial cost. In comparison, the B777-200 would take twomonths less. This fact favors the Boeing instead of the Airbus. TheNet Present Value (NPV) shows the current residual value of theaircraft based on the estimated life. The NPV is obtained after theaccumulated future value of the craft is deducted from the initialcost (Gotze, 2015, 110). B777-200 has a higher NPV than the A330-300,which would support the decision to purchase the former. The InternalRate of Return (IRR) informs the level of return expected from theproject after breaking even (Gotze, 2015, 146). A330-300 has an IRRof 9.3% while the B777-200 has an IRR of 10.5%. This furthervindicates the decision to purchase the Boeing instead of the Airbus.
The ProfitabilityIndex (PI) is used a check to determine the viability of a project(Pike & Neale, 2009, 46). The Airbus has a PI of less than onewhile the Boeing has a PI of 1.15. This statistic confirms theviability of acquiring the Boeing aircraft. At the same time, it alsoexposes the folly on pursuing the Airbus project. If the cost ofcapital is set at 10%, purchasing the Boeing seems ideal since theIRR is sufficiently above 10%. By contrast, the Airbus lags below10%. The airline would require a significantly higher sum so as toacquire the Boeing. However, running costs associated withcertification, licensing, maintenance and transportation of parts arelower than the Airbus. Sensitivity Analysis measures the reliabilityof obtained statistics vis-à-vis minor alterations in otherparameters (Bettner, 2015, 68). The consistency of the Boeingstatistics makes it more reliable. Therefore, the airline would bewell-advised to purchase the Boeing B777-200 rather than acquire theAirbus A330-300.
Bettner, M. S., 2015. Using Accounting & FinancialInformation: Analyzing, Forecasting & Decision-making. NewYork, NY: Business Expert Press.
Gotze, U., 2015. Investment Appraisal: Methods and Models. NewYork, NY: Springer.
Morrell, P. S., 2007. Airline Finance. Aldershot, UK: Ashgate.
Pike, R. & Neale, B. 2009. Corporate Finance and Investment:Decisions & Strategies. Harlow, England: Financial Times.