Vinoy Ahuja completed an aeronautical engineering course. But he did not opt for any job. Rather he thought of airline business. The business was helicopter services transporting persons and goods in the hilly areas of Arunachal Pradesh. Before actually starting operations, he calculated the initial investment of Rs 350 million and made various estimates for the next 6 years; the details of which are as follows:
The estimates were of his own. This is why he preferred to consult a À nancial analyst. The À nancial analyst utilised the concept of scenario analysis based on the level of income, weather in the region during different months and a number of other factors. According to him, the probability of optimistic, pessimistic and normal scenario was 30%, 30% and 40%, respectively. It was also estimated that in case of optimistic scenario, the revenue could increase by 15%, but under the pessimistic scenario, it could go down by 10% during all the years. Depending on the scenarios, the value of net cash inflow changed. Truly speaking, the inclusion of the scenario was a better course of action as it was closer to reality.
1. Calculate the NPV of the project under different scenarios.
2. Should Ahuja go for the project?
3. Ahuja may change the price of transportation per km; if he does it, explain the impact of changes in the rate on the sensitivity of the project.