65735 – PART AAnswer One question from this part.1. An aviation

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PART AAnswer One question from this part.1. An aviation maintenance company is considering investing in a machine, and itcan pick from two alternatives. The cost and cashflows associated with eachpurchase is shown below:MACHINE A:T0 T1 T2 T3 T4Cash flows(£) (90 000) 22 000 25 000 25 000 64 000MACHINE B:T0 T1 T2 T3 T4Cash flows(£) (90 000) 34 500 34 500 33 500 32 500a) Calculate the average return on capital employed (ROCE) over the life ofeach machine(give your answer to 2 dp). You can assume that the depreciationof both machines can be calculated using the straight-line method and they willnot have any scrap value.5 marksb) Which machine should the company buy and why? What disadvantage ofROCE does this example highlight?5 marksc) What are the other advantages and disadvantages of using Internal Rate ofReturn(IRR)?5 marksd) Instead of investing in this project, one manager thinks that it would be better tobuy into an annuity which will pay £29 000 each year for the next 4 years. Whatwould be your advice if the amount of money available for investing was £90 000only and the interest rate was 8%?5 marks2. Calculate the payback period of the following net cash flows (give your answer inyears and months):Year T0 T1 T2 T3 T4 T5Cashflow(£) (400000) 40000 120000 160000 200000 140000The 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 disadvantageof the payback period appraisal method?20 marksPART BAnswer 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 airportsexplaining their advantages and disadvantages.20 marks2. Fuel hedging is a strategy that airlines use to control their fuel costs in a marketwhere fuel prices can be quite volatile. Compare and contrast four hedgingmethods that airlines can use.20 marks3. There is considerable evidence that airlines seek to gain competitive advantage byoutsourcing some of their activities. Evaluate the use of outsourcing as an airlinestrategy.20 marks4. Airlines are faced with the dilemma of whether to buy or lease aircraft. Discussthe advantages and disadvantages of these two types of methods of acquiringaircraft.20 marks

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