5. You have the opportunity to expand your specialty freight business by purchas

Question

5. You have the opportunity to expand your specialty freight business by purchasing or leasing an additional aircraft.

You have determined the most suitable type of aircraft is a Shorts AirVan. You have calculated the increase in net profit over the next three years with this aircraft for five estimates of industry activity:

                rapid growth

                moderate growth

                slight to no growth

                slight decline

                and moderate decline

If you buy, your estimates of profitability increase are, respectively:

                $200k

                $100k

                -$40k

                -$80k

                -$150k

If you lease, your estimates are:

                $100k

                $50k

                -$20k

                -$40k

                -$60k

Of course you have the option to do neither.

a. If you have no good idea of the future of the market and you wish to make the choice that will maximize maximum profitability you will chose to_____________?

b. If you wish to chose the alternative that will minimize possible loss you will__________________?

c. If you estimate, based on your observations of the industry climate, the following probabilities for business growth;

                rapid growth .1

                moderate growth .3

                slight to no growth .3

                slight decline .2

                moderate decline .1

Which alternative is indicated?

Explanation / Answer

a. If you have no good idea of the future of the market and you wish to make the choice that will maximize maximum profitability i will choose to buy because the maximum attaianable profits are much higher as compared to leasing

b. If you wish to chose the alternative that will minimize possible loss i will take on lease because as seen from the data in extreme conditions the losses incurred are much higher for the case of purchase than leasing.

c.If you estimate, based on your observations of the industry climate, the following probabilities for business growth;

            For Purchase

                rapid growth .                 1 x 200

                moderate growth .          3 x 100

                slight to no growth .       3 x -40

                slight decline .                2 x -80

                moderate decline           .1 x -150

Net Effect +70(200+300-120-160-150)

      For lease

              rapid growth .                 1 x 100

                moderate growth .          3 x 50

                slight to no growth .       3 x -20

                slight decline .                2 x -40

                moderate decline           .1 x -60

Net Effect +50(100+150-60-80-60)

So Better Buy as per data

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