PART A
Answer One question from this part.
1. An aviation maintenance company is considering investing in a machine, and it
can pick from two alternatives. The cost and cashflows associated with each
purchase is shown below:
MACHINE A:
T0 T1 T2 T3 T4
Cash flows(£) (90 000) 22 000 25 000 25 000 64 000
MACHINE B:
T0 T1 T2 T3 T4
Cash flows(£) (90 000) 34 500 34 500 33 500 32 500
a) Calculate the average return on capital employed (ROCE) over the life of
each machine(give your answer to 2 dp). You can assume that the depreciation
of both machines can be calculated using the straight-line method and they will
not have any scrap value.
5 marks
b) Which machine should the company buy and why? What disadvantage of
ROCE does this example highlight?
5 marks
c) What are the other advantages and disadvantages of using Internal Rate of
Return(IRR)?
5 marks
d) Instead of investing in this project, one manager thinks that it would be better to
buy into an annuity which will pay £29 000 each year for the next 4 years. What
would be your advice if the amount of money available for investing was £90 000
only and the interest rate was 8%?
5 marks
2. Calculate the payback period of the following net cash flows (give your answer in
years and months):
Year T0 T1 T2 T3 T4 T5
Cashflow(£) (400000) 40000 120000 160000 200000 140000

The payback period can act as a good screening technique to eliminate any project that would put undue strain on the company’s liquidity position. One of the problems of this method is that it does not take into consideration the time value of money.
Assuming a discount rate of 10%, calculate the discounted payback period of the above scenario (give your answer in years and months).
Apart from the above-mentioned disadvantage, what is the other disadvantage
of the payback period appraisal method?
20 marks

PART B
Answer TWO questions only from this part. Each question is worth 20 marks. The word limit for each question is 1500 words.
1. Compare at least six sources of external finance available to airlines and airports
explaining their advantages and disadvantages.
20 marks

2. Fuel hedging is a strategy that airlines use to control their fuel costs in a market
where fuel prices can be quite volatile. Compare and contrast four hedging
methods that airlines can use.
20 marks
3. There is considerable evidence that airlines seek to gain competitive advantage by
outsourcing some of their activities. Evaluate the use of outsourcing as an airline
strategy.
20 marks
4. Airlines are faced with the dilemma of whether to buy or lease aircraft. Discuss
the advantages and disadvantages of these two types of methods of acquiring
aircraft.

20 marks