If Textron chooses to discount these savings at a rate of 15% per year of useful life, considering only a 10 year planning horizon, what is the potential cost savings to the customer over the life of this plane? Evaluate the potential financial benefit to Textron of adding winglets to an existing corporate aircraft, if the cost to Textron of each winglet is $556,000 per craft, assuming that demand for corporate aircraft will allow Textron to increase the craft’s price by the full amount of the savings accruing to the customer.
Savings achieved on the addition of winglets to an existing aircraft include: 3% of the gas bill, or 150,000 gallons of jet fuel per year.
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However, Textron chooses to discount these savings at a rate of 15% per year of useful life, which means that the annual total cost savings will be:
Considering only a 10 year planning horizon, the potential cost savings to the customer over the life of this plane will be:
Next, we will evaluate the potential financial benefit to Textron of adding winglets to an existing corporate aircraft. The cost of each winglet for Textron is $556,000 per craft. We make an assumption that demand for corporate aircraft will allow Textron to increase the craft’s price by the full amount of the savings accruing to the customer.
The manager that originally brought this idea forward understood this addition of Winglets to represent a net increase in revenues of almost double of the price of the Winglet. As Textron's production manager, it is your opinion that this estimate may not encompass facts related to project production and financing. Using concepts covered in this and previous modules, analyze additional concepts that indicate other concerns that we might have in making this change, including the impact on other areas of financial policy. Calculate the rate of return that would make the net present value of this project equal to zero, and comment on its importance in terms of the impact of this project, through the diversion of existing resources, and on future growth and sustainability in the face of fluctuating revenues.
There are a number of factors that affect the cost and the return on investment for a winglet modification in a plane. These include:
Residual Value – It is estimated that there is an approximate of 75% conservation when making winglet modification on planes. It is true that aircrafts that have winglets tend to sell more quickly and to worth more.
Fuel Savings – Improved fuel burn is a factor that facilitates even additional value of winglets. Operators get to fly faster for the same fuel burn, and this saves valuable time while at the same time lowering the direct costs of operation.
Perceived Value – Winglets are increasingly becoming a standard in aircrafts, and it is becoming a piece of equipment that people look out for. For this reason, the perceived value of winglets greatly affects their return on investment (Heisenman, 2018) .
The rate of return that makes the net present value of a given project equal to zero is known as the internal rate of return (IRR). At the IRR, the cash flow of the project is equal to the project’s cost, and it is important in that it helps the management to understand the minimum rate of return for which it can accept the project. The higher the IRR is above the hurdle rate, then the greater the value of the NPV. The converse is true.
References
Aviation Partners Boeing. (2016). Program list prices .Aviation Partners, Inc. (n.d.). Over 110 million gallons of jet fuel will be savednext year with Aviation Partners blended Winglet™ technology . [PDF ]
Heisenman, D. (2018). Retrieved from https://blog.duncanaviation.com/topic/wingletshttps://blog.duncanaviation.com/topic/winglets
Larson, G. (2001). How things work: winglets. Smithsonian Air and Space .Textron Aviation. (2016). Company .
Warwick, G. (2016). Winglets - All shapes, sizes - and uses .
