1. Given that each of the three corporate transportation alternatives covers a different length of time, what time period should be used to compare these options?
2. In constructing the cash flows associated with each option, how should the analyst treat Monkey Manufacturing $250,000 expenditure for computer hardware and software to coordinate its executive travel schedule? Why?
3. In constructing the cash flows associated with the commercial airline contract option, should the analyst include: (a) the average cost of economy tickets; (b) the cost of upgrading an economy fare to a first class ticket; and/or (c) both of these ticket prices? Be sure to explain your answer, and indicate how each of these costs would appear in the capital budgeting analysis.
4. In constructing the cash flows associated with the commercial airline contract option, should the analyst include the lost time that Monkey Manufacturing travelling executives spend waiting for connecting fights in airport terminals? If so, how should this time be represented in each year of the capital budgeting analysis?
5. What is the annual depreciation expense that Monkey Manufacturing may claim against taxable income under each of the three travel options?
6. Does each of the three travel options contain a different risk level? If so, how should the analyst incorporate the risk differential within the capital budgeting analysis? Be sure to identify the appropriate discount rate necessary to evaluate each alternative in answer, and explain your selection of each particular discount rate.
7. Should the capital budgeting analysis include the forecast inflation rates shown in Table 1? If so, demonstrate how each of these inflation factors will affect the various cash flows in the capital budgeting analysis.
8. What is the net salvage value that Monkey Manufacturing can expect to receive from (a) the aircraft purchase option, and (b) the aircraft time share option?
9. Based on your answer to question 1 through 8, prepare a schedule of corporate cash flows relevant to each of the three travel alternatives, and calculate the present value of the total cost of each option. In developing the cash flows, assume that capital expenditures necessary to fund a change in Monkey Manufacturing travel policy occur in the current period (Year 0) and all operating expenditure begins in the next fiscal year (Year 1).
10. In question 9, should the analyst focus on before tax or after tax cash flows? Why?
11. The case describes that Monkey Manufacturing has enjoyed several years of growing profitability. How does this information influence your answer to question 10? If the case included information that led you to believe that Monkey Manufacturing would suffer several years of financial losses over the next decade, how would this new information change your estimates of project cash flows expected from each of the three travel alternatives?
12. In evaluating capital budgeting projects with different project lives, financial analysis often use a technique called the Equivalent Annual Annuity. Would this technique be useful in this case to evaluate the three travel alternatives? Why or why not?
13. Is Sebastian Henry's assessment of the risk level of each travel alternative sufficient justification for the financial analysis to apply different discount rates to each of the three travel alternatives? Why or why not?
14. All things considered, which of the three should Sebastian select? Be sure to justify your answer on the basis of (a) your capital budgeting analysis of the three travel alternatives, and (b) the contextual information provided by the case.