Embed Size (px)
DESCRIPTION
CITY COLLAGE UNI. OF SHEFFIELD
Citation preview
CORPORATE FINANCIAL MANAGEMENT
COURSEWORK
Written by: B. O. Mesci
Submitted to: Dr. I. Asimakopoulos
02.04.2013
Part I. CORPORATE FINANCIAL ANALYSIS OF
TURKISH AIRLINES 2013
Part II. EVALUATION OF SUPERTYRE PROJECT
2 | P a g e
Part I. CORPORATE FINANCIAL ANALYSIS OF TURKISH
AIRLINES 2013
1 Abstract
The purpose of this study is to understand company evaluation on the firm I choose, Turkish
Airlines. This study can easily provide opinions, ideas and new approaches to analysts within the support
of an operational company case. GDPs (Gross Domestic Products) are falling sharply in Europe since
2008. Economist Schiller (2010) is defining the GPD as the total market value of all final goods and
services produced within a nation’s borders in a given time period. And Eichengreen (2009) as cited in
Eaton, et al. that “The collapse of trade since the summer of 2008 has been absolutely terrifying, it as far
as we have lack an adequate understanding of its causes.” Fluctuations in economic activity or -“business
cycles,” as they are called- are a recurrent plague for mixed economies such as ours.
Companies started to develop more detailed medium and long-term plans after receiving huge
effect of global crisis, recessions. In this report; Turkish Airlines, an international well-known company
has been chosen as the case company in Part A. All of the values and numbers which are presented in
here are controlled operational numbers. In part B we are evaluating Supertyre project in terms of
profitability.
Table of Contents
Introduction.............................................................................4
Turkish Economy......................................................................6
International Aviation Market..................................................7
Turkish Aviation Sector............................................................9
The Company.........................................................................10
Valuation of THY....................................................................13
Conclusion..............................................................................17
References.............................................................................14
3 | P a g e
Abbreviations
AEA Association of European Airlines
ASK Available Seat Kilometres
BIST Borsa Istanbul
BMI Business Monitor International
CAGR Compound Annual Growth Rate
CAPA Canter for Aviation
CPI Consumer Price Index
DCF Discounted Cash Flow
DHMI Turkish General Directorate of State Airports Authority
EASA European Aviation Safety Agency
EBIT Earnings Before Interest and Taxes
EBITDA Earnings Before Interest, Taxes, Depreciation and
Amortization
EIU The Economist Intelligence Unit
EU European Union
FYE Formal Year End
GDP Gross Domestic Product
IATA International Air Transport Association
ICAO International Civil Aviation Organization
IMF International Monetary Fund
KAP Turkish Public Disclosure Platform
LCC Low Cost Carrier
PLF Passenger Load Factor
PPP Purchasing Power Parity
RPK Revenue Passenger Kilometres
THY Turkish Airlines
TL Turkish Lira
TOBB The Union of Chambers and Commodity Exchanges of
Turkey
Turkstat Turkish Statistical Institute
UN United Nations
USD United States Dollar
VAT Value Added Tax
WACC Weighted Average Cost of Capital
YoY Year on Year
4 | P a g e
2 INTRODUCTION
Turkish Airlines became a member of Star Alliance in April 2008, as the 20th member of Star Alliance.
This membership increased the brand awareness of Turkish Airlines, as well as rapidly increasing its sales.
Turkish Airlines’ promotional campaign with the slogan “feel like a star”, which was launched in 2009, was a big
success. Its new slogan “Globally Yours” was also another successful marketing campaign. In addition, its
sponsorship agreements with Barcelona and Manchester United football clubs attracted worldwide attention.
The company used famous stars such as Kevin Costner, Caroline Wozniack, Lionel Messi and Kobe Bryant, which
increased the brand awareness of Turkish Airlines all over the world. The company keeps adding new
destinations. In 2012 Turkish Airlines continued to expand its international network not just to strengthen its
stature as a global carrier, but also to offer its passengers a much broader range of product and service options.
The company added 32 international and 2 domestic destinations to its flight network, thereby joining the ranks
of the world’s top 5 airlines in terms of number of flight destinations.
Turkish Airlines was ranked first amongst Turkish airlines, and held a 54% market share of air travel in
2011. THY is growing both internationally and domestically. The company is expanding on routes into new
regions of the world, as well as having invested hugely in its infrastructure and generally responded to
market conditions with innovation throughout 2012. Currently, the Company owns 202 aircrafts 159 of which
narrow-body aircrafts with an average age of 6.6 years. Furthermore, in 2012 Turkish Airlines ordered a total of
95 and 117 narrow body aircrafts from Boing and Airbus respectively which is going to be delivered between
the years 2016-2021 parallel to the company’s long term goals.2 By the end of 2012, the company has 17,879
personnel with an increase of 38% compared to 2007.
THY has an intention “to have the largest network” since having the largest network is cheaper and
captures more passenger. As of April 2013, Turkish Airlines flies to 217 destinations. While adding new
destinations THY also increases frequencies of the existing lines. Management enjoys the geographical location
of Istanbul, which makes it a natural hub between East and West. Note that 75% of the global passengers are in
Europe and Asia, which provides an excellent opportunity to THY.
The record improvement in the load factor with cost containment lead to an astonishing 210% YoY
increases in EBIT figure, from TL 338 million to TL 1.1 billion while 117% increase in EBITDA. THY also nearly
caught up European Airlines in terms of load factors. The company recorded a total load factor of 77.4%, while
AEA member airlines' were 79.1% in the end of the 2012.
THY stock has showed the best performance in Turkish stock market. The company’s shares rose by
84.5% YoY, over performing the BIST-100 index which increased by 52.3% in the 2012. Compared with the
peers, THY shares appreciated at a rate faster than appreciation of the overall aviation indexes.
5 | P a g e
3 TURKISH ECONOMY
Graph 1. Comparison of GDP Growth Rates
Source: IMF
While the global economy slowed down and the borrowing problems continued in most of the EU member countries, Turkey’s growth tendency differed from developed economies. Turkey recorded a GDP growth of 8.5% in 2011.
Turkish economy, which is a diversified, large and fast-growing economy, has recorded a high growth performance since 2010 thanks to strong medium term programme which has diminished uncertainties and improved macroeconomic fundamentals.
Between 2002 and 2011, Turkey’s GDP per capita increased from USD 3.492 to USD 10.469, whereas GDP grew with an average growth rate of 12% between 2009 and 2011. CPI on the other hand has been on a stable trend. According to the medium term programme of Ministry of Development, GDP growth rate will be 3.2% and 4% in 2012 and 2013, respectively.
Pillars of the implemented economic programme include:
● Improved investment climate;
● Smaller, more transparent and effective public sector;
● Sound and competitive financial system;
● Accelerated privatization;
● More efficient business infrastructure, focusing on communications and energy
Based on IMF World Economic Outlook Study, Turkey is the 16th largest economy in the world and 6th in Europe in 2011 (GDP based on PPP, October 2012). In November 2012, Turkey has been upgraded to “investment grade” by Fitch. Extended average maturity of debt, sound banking system and favorable growth prospect seem to be the main supporting pillars of the Fitch’s decision.
Turkey’s favorable demographic profile also supports the growth prospects of the country. According to Eurostat data, Turkey, with a population of 72 million, has the youngest population in Europe. 64% of the population of Turkey is in the range of 14-60 years of age.
6 | P a g e
Graph 2. Demographic Profile
Source: UN
4 INTERNATIONAL AVIATION MARKET
Worldwide international and domestic revenue passenger kilometers flown grew 5.9% to a new high of
5.2 trillion kilometers in 2011. The growth of the past two years compares favorably with the 4% to 5% trend of
the past 20 to 30 years. Contributing to the surge in air travel was a rebound from the recession of 2008 and
2009. Clearly, air travel demand remains robust despite slow economic growth in many regions. The regional
experience continued to be diverse. Asia-Pacific airlines delivered the largest absolute net profits and the
highest EBIT margins for the second consecutive year. But within this region there was much variation, with
significant losses in Indian domestic markets and substantial profit in Chinese domestic markets. Next to Africa,
the weakest performing region was Europe, where EBIT margins barely exceeded 1% on average. But again
there is much variation, with the large quoted airlines in Europe delivering a similar performance to those in the
United States. US airlines saw their profits reduced in 2011, but they continue to generate EBIT margins close to
3% despite little market growth as a result of limited additional capacity. Profitability in the US domestic market
has been particularly robust as a result. Elsewhere, the Latin American airlines continued to show reasonable
profit, albeit at margins that were lower than in 2010. The Middle Eastern airlines saw only a minor reduction in
profitability in 2011, as structural improvements at some airlines partly offset the rise in fuel costs.
Airline industry revenues expanded 9.4% in 2011 to USD 598 billion, driven in equal part by a rise in
volumes and an improvement in yield. Passenger and cargo revenues rose above prerecession levels, but the
industry has lost around two years of revenue growth since early 2008. In 2010, the network airlines had a
strong boost relative to other airlines in the industry from the robust growth of long-haul premium revenues
and cargo. During 2011, there was further growth in the premium segment, but there was no longer the marked
gain versus other segments.
7 | P a g e
Pers
on(m
n)
Table 1. Airline Traffic Distribution in 2011
Asia Pacific North America
Europe Middle East Latin America
Africa
Asia Pacific 58% 15% 17% 17% 1% 7%
North America 15% 50% 23% 10% 34% 5%
Europe 16% 23% 36% 30% 30% 52%
Middle East 10% 3% 8% 16% - 15%
Latin America - 8% 9% - 34% 1%
Africa 1% 1% 7% 7% 1% 2%
Total Traffic 100% 100% 100% 100% 100% 100%
Source: Boeing Annual Report,2011
Graph 3. Top Arrival and Departure Destinations Globally 2011
100 Departures Arrivals
80 60 40 20 0
Cargo revenue growth slowed sharply in 2011 sign of buoyant air travel markets in 2011 was
the growth in the sale of first- and business-class seats, which expanded 5.5% on international markets
compared with the growth in economy seat sales of 5.1%. This, however, was not apparent in all
markets. Within Europe, where distances are relatively short, there has been a structural shift away
from premium seats, resulting in the faster growth of economy travel. On the important transatlantic
and transpacific markets, though, premium travel continued to grow substantially faster than economy
travel. This reflected the continuation of business travel growth in most regions and the lull in leisure
travel in many developed economies because of weak consumer confidence. After an exceptionally
strong rebound in 2010, air freight metric ton kilometers flown fell 0.4% worldwide in 2011. The air
freight market is no bigger than it was four years ago. Since air freight volumes have on average grown
from 5% to 6% a year over the past 20 to 30 years, growth in the past four years has been
exceptionally weak. Even so, with the estimated value of world trade at more than USD 16 trillion in
2011 airlines were still responsible for carrying more than USD 5 trillion worth of the world economy’s
internationally traded goods.
8 | P a g e
France US China Spain Italy UK Turkey Source: EIU, Turkstat, World Bank, 2013
5 TURKISH AVIATION SECTOR
In 2012 negative effects of global recession was decreased compared to 2011 and consumption
values are increased. Air traffic is one of them. Number of domestic passengers is increased 4% in 2012.
One of the reasons behind increasing capacity is flexible pricing policy. Also during this period number of
budget airlines increased their sales potential. Business passengers meet with budget airlines within
recession time. Airline industry became more competitive. Istanbul Ataturk Airport is Turkey’s biggest
airport and serves for Europe and Asia travellers. Ankara, Antalya, İzmir are other big airports of Turkey.
Please find the nap of Turkish Airports below.
Source: Portturkey
Turkey’s biggest airline company is Turkish Airlines (2013). Company is investing for a new fleet
and spending on marketing. Company is travel sponsor of Manchester United and Barcelona football
teams, besides main sponsor of Turkish Airlines Euroleague Basketball. Well known players Lionel Messi,
Kobe Bryant and Tiger Woods have taken roles in THY Campaigns so far.
Turkish Airlines has some competitors in the domestic market. Pegasus is at the top of the list.
Company improved its sale values 21% in 2012 compared to 2011. They are managing strong campaigns
and providing affordable pricing. They got 40 aircrafts and ordered 25 for forthcoming year. Pegasus is
International & Domestic Flights
Domestic Flights
International Charter and Domestic Flights
9 | P a g e
cooperating with AirBerlin in German flights. From sales perspective the ranking as; Turkish Airlines,
Pegasus Airlines and Sun Express. Sky Airlines is a new comes, a small ones.
By increasing number of budget airlines, servicing issue is becoming more important. It may be a
problem in near future. Companies are trying to provide max. profit and because of that lack of interest
on maintenance and servicing may be a major problem soon. Affordable pricing can result in umber of
passenger increase. 9% CAGR increase is expected within 2011-2016 period.
Table 2. Turkish Operators KPI in 2011
Average
Load Factor
Average Price/
kmh flown per
Company RPK mn % Passenger passenger
Atlasjet 6,116 87.0 153.0 2,265
Onur Air 18,956 73.0 159.9 1,741
Pegasus 9,658 77.0 154.9 1,341
THY 47,183 80.0 217.2 1,621
Source: Euromonitor
6 THE COMPANY, TURKISH AIRLINES
Star Alliance approved THY’s application for being member in 2008. This provided a good impact
on THY’s awareness and sales were moved upwards. By getting awareness, company increased number
of destinations. Turkish Airlines is at top 5 airlines companies in World, which are offering most
international destinations. Turkish Airlines has got 202 aircraft; 150 of them narrow body aircrafts with
an average age of 6.8 years. 95 and 117 narrow body aircrafts have been ordered to Boeing and Airbus.
New planes will be delivered between the years 2016-2021. Company has got 17,879 employees in 2012.
Company is using web portal vey affective. Information regarding schedules, destinations, earned miles
can be easily reached from THY web portal.
Graph 4. THY Destinations in 2012
10 | P a g e
Source: Turkish Airlines Board Presentation,2012
Graph 5. Capacity Growth THY
Source: Turkish Airlines Annual Report, 2012
Graph 6. Financial Growth THY
The record improvement in the load factor with cost containment lead to an astonishing
210% YoY increases in EBIT figure, from TL 338 million to TL 1.1 billion while 117% increase in EBITDA.
THY also nearly caught up European Airlines in terms of load factors. The company recorded a total
load factor of 77.4%, while AEA member airlines' were 79.1% in the end of the 2012. Limited YoY
increase at nearly all cost items, including personnel, catering and ground handling are eye-catching.
THY has been managing costs effectively through its subsidiaries, THY OPET, THY DO&CO and THY
Technic. THY cut its delivery markup to half through its subsidiary THY OPET, according to the
calculations. Also, younger fleet decreased the consumption by 1% to27.9 kg per 1mn ASK. On the
other hand, per passenger catering expenses decreased by 9%.
11 | P a g e
Source: Turkish Airlines Annual Reports
Graph 7. Cost Distribution 2012
THY stock has showed the best performance in Turkish stock market. The company’s shares
rose by 84.5% YoY, over performing the BIST-100 index which increased by 52.3% in the 2012.
Compared with the peers, THY shares appreciated at a rate faster than appreciation of the overall
aviation indexes. Besides 4.8 point YoY improvement in load factor and 19.6% passenger growth, THY
achieved significant savings at per unit costs across almost all categories. It is expected that the
reductions in catering, ground handling, personnel, commissions, parking, landing and maintenance
per unit costs will stay low in the long term. In addition, THY receives these services from its
subsidiaries and joint-ventures where service fees are based on costs plus margins. However, it may
seen marginal increases in maintenance and fuel expenses as the fleet gets older, while the sharp
decline in fuel delivery mark-up may not be sustained in the future. THY aims to prevent this situation
by purchasing fuel-efficient new generation aircraft in near term. THY has managed to improve its fuel
efficiency through usage of winglet and younger fleet expansions. Also, starting from 2008, the
company has been working with IATA’s Green Team to boost fuel efficiency. In fact, THY succeeded in
reducing its consumption by 18% since 2005 and remains to be one of the lowest fuel consuming
airlines among its European rivals. In 2011, fuel consumption per 100 ASK reduced to 2.76 tons from
2.85 tons in 2010. On the other hand, it is anticipated that consumption will stay flat at 2.76 tons
throughout the next five years.17 Despite ongoing efforts for improvement, congestion problems at
Istanbul Ataturk Airport will slightly increase the consumption.
12 | P a g e
Source: THY Annual Report, 2012
7 VALUATION OF THY
To valuate THY; we have to understand global peers first. Following to this to identify WACC, DCF
output has to be identified. After getting the WACC, we have to provide EBITDA, EBIT margins and by
discounting cash flows to the present value we will identify THY’s current value in the market.
Table 3. Competition Peers
13 | P a g e
Graph 8. GPRV Score of THY
So as to create more concrete peer analysis, we used GPRV Scoring System20 which measures
Turkish Airlines’ attractiveness relative to 565 companies in the Travel & Leisure sector. The result was
parallel to our previous conclusions and stated that the Company has more profitability and growth
prospects compared to other 565 companies. Furthermore, GPRV score states that Turkish Airlines is
undervalued and faced with low downside risk. At this point it is important to highlight several
considerations. After obtaining levered Beta of the peers, we unlevered it while taking into account
their Debt to Equity ratios. Then, we relever this calculated Beta to Turkish Airlines Debt to
Capitalization ratio, which is 163.3% in 2012 FYE. We assumed that D/E ratio will stay the same in the
near future. Additionally, THY's Cost of Debt is taken as 13.58% from Bloomberg. While calculating Cost
of Equity, we took 2-year Turkish Treasury Bond as a benchmark for risk free rate. Also, Market Risk
Premium again obtained from Bloomberg as 5.9%.
14 | P a g e
Table 4. THY’s Financial Results last years
Let us start with the revenues of the company. Turkish Airlines grew 20.65% CAGR between
the years 2009 and 2012. In the future, it is expected that the THY’s aggressive marketing strategy will
continue and aim worldwide success. Also, by the help of the Istanbul’s geographical location and 3rd
airport project it can be confidently say that THY will have the capacity to support this growth by any
means. Moreover, THY’s total order of 212 aircrafts for the following years will enable it to compete
with the global brands and it will become a carrier that has the world’s one of the biggest aircraft fleet.
From competitive point of view, carriers in the Turkish market have not financial capacity that can
support their future investments that can match with THY’s. Furthermore, Pegasus, one of the most
successful carrier in Europe recent years is not a direct competitor with THY, since its business plan
built upon as being a low cost carrier(LLC). Thus, domestic market will keep its current trends. However,
for international carriers the situation is not the same. Turkish Airline’s future growth will directly effect
their it’s European counterparts, since Europe’s aviation market is saturated. Additional, current
economic situation of Eupean countries will prevent them to invest huge amount of money to their
national carriers. Even more, in 2011 and 2012 numerous European airlines ceased their operations due
to financial difficulties. Considering both previous growth rates and reasons stated below we expect
that the Turkish Airlines will have CAGR of 8.2% between 2013 and 2017. However, yearly growth rates
will be in a decremental trend, because of the market limitations. As a result, for the forecast period we
anticipate that its costs will be around 20% of its revenues. Similarly, Selling General&Administrative
expenses of the Company will deviate around 11%. Consequently, EBITDA and EBIT margins of the THY
will have 5.6% and 12.3% CAGR respectively for the years between 2013 and 2017.
15 | P a g e
Table 5. THY’s Net Working Capital Change
We are assuming 3% growth annual after the forecasted period follows 2017. As can be seen from
attached figures we have found that Net Present Value of The Company is TL20.862.661,00.
16 | P a g e
8 CONCLUSION
Turkish Airlines is Turkey’s biggest airline company with a 54% value share of air travel in 2011.
Company is investing lot on infrastructure to improve its services and opening new destinations every
month. Its one of the top 5 airline companies which are providing the most direct point of destinations
international. Besides company has got 159 narrow body aircrafts and in total 202. Average age of the
fleet is 6,8 years. New 212 plane orders are submitted to Boeing and Airbus; 96 to Boing and 117 to
Airbus. Planes would be delivered to Turkish Airlines between years 2016 to 2021. It proofs Turkish
Airlines’ long term plans and objectives. Company is planning to double its number of narrow body
aircrafts. On the other hand company has some competitors; and these are Pagasus Airlines, Onur
Airlines and Atlasjet. Turkish Airlines has got some advantages and disadvantages compared with these
others. Turkish Airlines is popular with its world class quality services. It is a kind of advantage but on the
other hand, Turkish Airlines’ prices are higher compared to other Turkish Companies. In international
marker Turkish Airlines again has some advantages. Competitors; international players such as KLM,
Lufthansa, Ryanair, British Airways are decreasing their winter seating capacities or grounding some of
their airplanes. This would probably provide a new market share for Turkish Airlines. Besides Turkish
Airlines is providing new routes to its customers and these type of direct flights can attract new
customers.
Istanbul is a city which half of it is in Europe and the other half is in Asia. Location of Turkey and
mainly Istanbul is very attractive. People going or coming from Europe can use Istanbul Airports as a mid-
stop. And Turkish Airlines is strong in this location. A new airport is under construction in Istanbul. It has
been designed as the biggest of Europe and this may provide additional capacity to Turkish Airlines.
As conclusion; readers can easily realise that Turkish Airlines has got advantages and big
objectives compared to other airline companies. Company is being expected to reach a quarter billion
revenue with an actual share price of TL 11,5 per stock.
17 | P a g e
Part II. EVALUATION OF SUPERTYRE PROJECT
Company managers have a big impact on company future. Capital budgeting is one of the crucial
one. Companies invest in new products to be sustainable. Besides sustainability most of the main
objective of firms to provide bigger profits and for this manager has to make the best decisions. In this
case study I have developed a report for the Tires Inc. CFO which is going to give a decision to carry on
with SuperTyre project or cancellation of the project. Research and Development stage has already
started for the SuperTyre project. Test marketing is taking place as well. In my financial analysis I am
recommending to CFO to go ahead with the project. The report focus on the Net Present Value (NPV),
payback period, Internal Rate of Return (IRR) and profitability index of the project mainly.
Tires Inc. is a tire producing company. A new tire; SuperTyre has been developed by Tires Inc. The
research and development costs so far have totalled about €10.000.000. This tyre would be a 4 seasonal
product. Expected life span of the product within shelves is around 4 years. Test marketing costing
€5.000.000 is proofing us that there is a significant market for SuperTyre tire. Tyre Inc. can provide its
new product SuperTyre in two main markets; OEM (The Original Equipment Manufacturer) market and
the replacement market. The OEM Market consists primarily of the large automobile companies (like Kia
Motors Company) that buy tires for new cars. In the OEM market, SuperTyre is expected to sell for €38
per tire. The replacement market consists of all tires purchased after the automobile has left factory.
This market allows higher margins; Tires Inc. expects to sell the SuperTyre for €59 per tire there.
Parameters of the project are as given below:
Cost of Equipment:
Tires Inc. has to invest €140.000.000 for the production equipment to make SuperTyre tires. This
equipment can be sold for €54.000.000 at the end of four years.
Variable Cost:
In the OEM market, the SuperTyre Tire is expected to sell for €38 per tire. The variable cost to produce
each tire is €22. Variable costs are the same as OEM market in the replacement market. Tires Inc. intends
to raise prices 1% above the inflation rate; variable costs will also increase at 1% above the inflation rate.
The Immediate Initial Working Capital
The immediate initial working capital requirement is €9.000.000. Thereafter, the net working capital
requirements will be 15% of sales.
Rate of Inflation
Annual inflation is expected to remain constant at 3,25%.
18 | P a g e
Corporate Tax
Tires Inc. corporate tax rate is 40%.
Marketing Cost
The SuperTyre project will incur €26.000.000 in marketing and general administration costs the first year.
This cost is expected to increase at the inflation rate in the subsequent years.
Discount Rate
The Tires Inc. uses a 15,9% discount rate to evaluate new product decisions.
Percentage of Market Share
Automotive industry analysts expect automobile manufacturers to produce 5,6 million new cars this year
and production to grow at 2,5% per year thereafter. Each new car needs four tires (the spare tires are
undersized and are in a different category). Tires Inc. expects the SuperTyre tire to capture 11% of the
OEM market. Industry analysts estimate that the replacement tire market will be 14 million tires this
year and that it will grow at 2% annually.
EVALUATION of THE TIRES INC.’ SUPERTYRE PROJECT
By providing sub category calculations we would provide cash flow at last stage. Tires Inc. is
investing $140.000.000 for the production equipment. For the deprecation I choose using MACRS
(Modified Accelerated Cost Recovery) method.
SuperTyre aims two distinct markets; the original equipment manufacturer and the replacement market.
In original equipment manufacturer market; selling price target is €38 and €59 in the replacement
market. The variable cost to produce each tire is €22. Tires Inc. intends to raise prices at 1% above the
Years MACRS %
Ratio Depreciation Ending Book
Value
1 0,143
20.020.000,00
119.980.000,00
2 0,245
34.300.000,00
85.680.000,00
3 0,175
24.500.000,00
61.180.000,00
4 0,125
17.500.000,00
43.680.000,00
5 0,089
12.460.000,00
31.220.000,00
6 0,089
12.460.000,00
18.760.000,00
7 0,089
12.460.000,00
6.300.000,00
8 0,045
6.300.000,00 -
19 | P a g e
inflation rate, in other terms 4,25% annual. Variable costs will also increase at 1% above the inflation
rate. Revenue and expenditure calculations would be varied in OEM and Replacement markets. Industry
analysts expect automobile manufacturers to produce 5,6 million new cars this year and production to
grow at 2,5% per year thereafter. Each new car needs four tires (the spare tires are undersized and are in
a different category). Tires Inc. expects the SuperTyre to capture 11% of the OEM market. Industry
analysts again estimate that the replacement tire markets will be 14 million tires this year and that it will
grow at 2% annually. Tires Inc. expects the SuperTyre to capture an 8% market share.
In OEM Market the revenue would be such as;
Number of new cars is 5.600.000
Number of new tires is 22.400.000
Demand to the SuperTyre is 11% in other terms 2.464.000
Years 1 2 3 4
Sale Unit 2.464.000,00 2.525.600,00 2.588.740,00 2.653.458,50
Price € 38,00
€ 39,62
€ 41,30
€ 43,05
Sales Revenue € 93.632.000,00
€ 100.051.644,00
€ 106.911.434,84
€ 114.241.550,09
Variable Cost/Unit € 22,00
€ 22,94
€ 23,91
€ 24,93
Variable Cost € 54.208.000,00
€ 57.924.636,00
€ 61.896.093,86
€ 66.139.844,79
In Replacement Market the revenue would be such as;
Industry analysts estimate that the replacement tire markets will be 14 million tires this year and that it
will grow 2% annually. Tires Inc. expects the SuperTyre to capture an 8% market share.
Demand to SuperTyre in replacement market is 1,120,000
Years 1 2 3 4
Sale Unit 1.120.000,00 1.142.400,00 1.165.248,00 1.188.552,96
Price € 59,00
€ 61,51
€ 64,12
€ 66,85
Sales Revenue € 66.080.000,00
€ 70.266.168,00
€ 74.717.529,74
€ 79.450.885,25
Variable Cost/Unit € 22,00
€ 22,94
€ 23,91
€ 24,93
Variable Cost € 24.640.000,00
€ 26.200.944,00
€ 27.860.773,80
€ 29.625.753,82
20 | P a g e
Total Revenue would be such as;
Years 1 2 3 4
Sale Unit 3.584.000,00
3.668.000,00
3.753.988,00
3.842.011,46
Sales Revenue € 159.712.000,00
€ 170.317.812,00
€ 181.628.964,58
€ 193.692.435,35
Variable Cost € 78.848.000,00
€ 84.125.580,00
€ 89.756.867,66
€ 95.765.598,61
Capital Gain and Salvage Value;
Salvage Value Book Value (End of 4 Years)
Capital Gain Tax on Capital Gain (40%)
After Tax Capital Gain
54.000.000,00 43.680.000,00 10.320.000,00 4.128.000,00 49.872.000,00
Capital Budgeting Techniques
There are some main capital budgeting techniques. These are mainly Payback Period, NPV, IRR
and Profitability Index. I would be happy to start with NPV which I using commonly at work.
NPV (Net Present Value)
We are identifying the NPV by finding out present values of existing and future cash flows of
investments. NPV of the project refer to total present value of future cash flow + initial
investment. To make the investment its preferred to have plus NPV.
The immediate initial working capital requirement is €9.000.000
Year 1 2 3 4
Sale Revenue € 159.712.000,00
€ 170.317.812,00
€ 181.628.964,58
€ 193.692.435,35
Variable Cost -€ 78.848.000,00
-€ 84.125.580,00
-€ 89.756.867,66
-€ 95.765.598,61
Depreciation -€ 20.020.000,00
-€ 34.300.000,00
-€ 24.500.000,00
-€ 17.500.000,00
Income € 60.844.000,00
€ 51.892.232,00
€ 67.372.096,93
€ 80.426.836,73
Taxes -€ 24.337.600,00
-€ 20.756.892,80
-€ 26.948.838,77
-€ 32.170.734,69
Income After Tax € 36.506.400,00
€ 31.135.339,20
€ 40.423.258,16
€ 48.256.102,04
15,9 % Considered as discount rate.
By using an Excel Formulation; we find NPV as -€32.787.000
21 | P a g e
Payback Period
The PBP of this new product will be : 3 + (31.935.002,64/48.256.102.04) = 3, 66 years
This refer to the amount of time (in years, month, etc) required to recover the initial cost.
Year 1 2 3 4
Opening Balance -€ 140.000.000,00
-€ 103.493.600,00
-€ 72.358.260,80
-€ 31.935.002,64
Cash Flow € 36.506.400,00
€ 31.135.339,20
€ 40.423.258,16
€ 48.256.102,04
End Balance -€ 103.493.600,00
-€ 72.358.260,80
-€ 31.935.002,64
€ 16.321.099,39
Discounted Payback Period
This method accounts for the time value by discounting the cash flows by the discount rate.
Year 1 2 3 4
Opening Balance From Investment -€ 140.000.000,00
-€ 109.298.117,60
-€ 83.113.297,33
-€ 49.117.337,22
Discounted Cash Flow € 30.701.882,00
€ 26.184.820,27
€ 33.995.960,11
€ 40.446.445,42
Ending Balance -€ 109.298.118,00
-€ 83.113.297,33
-€ 49.117.337,22
-€ 8.670.891,80
As can be seen from the above table; ending balance is still minus within first 4 years. In other terms project looks
risky.
-1,6E+08
-1,4E+08
-1,2E+08
-1E+08
-80000000
-60000000
-40000000
-20000000
0
20000000
1 2 3 4 5
Discounted Payback Period
Year Ending Balance
22 | P a g e
IRR (Internal Rate of Return)
IRR rate is the value which provides NPV as zero.
NPV=(140,000,000)+(36,506,400/(1+IRR))+(31,135,339,20/(1+IRR)2)+(40,423,258.16/(1+IRR)3)+(48,256,102.04/(1+IRR)4) 0=(140,000,000)+(36,506,400/(1+IRR))+(31,135,339,20/(1+IRR)2)+(40,423,258.16/(1+
IRR)3)+(48,256,102.04/(1+IRR)4) Internal Rate of Return is 4,4 %. It is lower than 15,9% (Tires Inc. Discount Rate). IRR is not supporting the investment decision.
PI (Profitability Index)
Profitability is total discounted cash flow over initial investment.
If profitability index is bigger than 1; project is affordable in other terms profitability.
If project profitability index is smaller than 1; project is not profitable.
Discounted Cash Flow € 30.701.882,40
€ 26.184.820,27
€ 33.995.960,11
€ 40.583.381,81
Total Discounted Cash Flow € 131.466.044,59
Initial Investment € 140.000.000,00
Profitability Index € 0,94
Main Findings
Net Present Value of the project is negative. Payback period is 3, 66 years. Discounted payback period is more than four years. IRR is 4,40% whereas our discount rate is 15,9%. PI is 0,94 which is less than 1 indicating this is not a good project. As a result we should reject the project.
If you have some queries regarding on SuperTyre project, please do not hesitate to contact me via
23 | P a g e
9 REFERENCES
Atalik, Özlem, and Melike Arslan. "Customer Value Analysis from a Customer's Perspective: Case of
Turkish Airlines Domestic Passengers." International Business Research 2.3 (2009): P85.
Başçı, Erdem. "TOBB International Business Forum." (2012).
Eaton, J., Kortum, S., Neiman, B., Romalis J., 2011.Trade and the global recession.Cambridge: National
Bureau Of Economic Research.
Graue, Oliver. "Concentrated Might in the Sky–Airline Alliances and Travel Management." Trends and
Issues in Global Tourism 2012. Springer Berlin Heidelberg, 2012. 151-156.
International Air Transport Association. Bulletin-International Air Transport Association. No. 2-12.
International Air Transport Association., 2012.
International Air Transport Association. "Air Transport and the Environment." Air Transport Action
Group (2012).
Kumazawa, Risa. "The Effect of Organic Farms on Global Greenhouse Gas
Emissions." Transportation 19.24.7 (2012): 13-5.
Schiller, Bradley R., Cynthia Hill, and Sherri Wall. The economy today. McGraw-Hill, 1994.
Torlak, Gokhan, et al. "Analyzing business competition by using fuzzy TOPSIS method: An example of
Turkish domestic airline industry." Expert Systems with Applications 38.4 (2011): 3396-3406.
Turkish Airlines. "Turkish Airlines’ 2010 Annual Report, Last Accessed on 4 27, 2012."
TOBB. Türkiye Odalar ve Borsalar Birliği Annual Report, 2012.
Turkish Airlines. "Turkish Airlines’ 2010 Annual Report, Last Accessed on 4 27, 2012."
