LFV:s investeringsmodell

Abstract

In the last few years the airline industry had experienced a rapid growth within the low cost segment. The expenses for the airline companies have during the same period increased, mostly due to higher fuel prices and higher capital costs for airplanes. As a result of this, the economic situation for the airline companies has come to be very strained. The Swedish Civil Aviation Authority (LFV), which runs 17 airports and all air traffic control in Sweden, has been required to lower its cost in order to facilitate a further expansion of low cost air travel.
A great number of vehicles used at LFV airports are fairly advanced in years and therefore also have a low reliability. This is especially true regarding the snow clearing vehicles of which some are older than 30 years and consequently requires extensive maintenance. Reports indicate that there are savings to be made by better and more efficient management of the airport vehicles. One explanation to why airport vehicles systematically have been set aside in the priority between different investments might be found in the model LFV is using to evaluate new investments. The purpose of this report is therefore to describe the current investment model that LFV is using to evaluate investments in snow clearing vehicles.
This report is limited to explain the investment model strictly from a business economy perspective. Factors such as environmental aspects or image will not be dealt with. The concluding discussion about making changes to the investment model is assuming that the adapted model will be used to evaluate investments in airport vehicles only. This report could be referred to as a descriptive study of qualitative nature.
Today LFV is using an investment model which automatically calculates the key values of the investment studied. In order to evaluate investments and make priorities between them the LFV is referring to the internal rate of return (IRR). The IRR is presented in the investment model together with the net present value (NPV) and the pay back time. These three key values represent the basic information about the investments economic consequences. In addition to these key values the investment model also allows compensation for inflation and evaluation of different future scenarios. The discount rate for the investments is based on the cost for LFV’s debt, but is not calculated within the investment model.
Generally LFV’s investment model is working as expected and all calculations are performed correctly. There are however some exceptions regarding calculation with the discount rate. These calculations are not done in the correct manner and the result of this is that the numbers presented are slightly more pessimistic than they should be.
When it comes to evaluation of new investments in airport vehicles an adaptation of the investment model could result in better information about the economic consequences of such investments. Initially the calculations including discount rates should be corrected letting the investment model present the correct economic results. A discount rate related to the level of risk of the investment could make low-risk investments seem more profitable. This would probably favour investments such as airport vehicles since these are associated with a relatively low risk. Also, considering the investments different requirement of capital and the tax consequences would further improve the economic information which the investment decisions are based upon.

• author: Johansson, Joel
• supervisor: Ingela Elofsson
• organization: Production Management
• course: MIO920
• year: 2007
• type: M1 - University Diploma
• subject: Technology and Engineering
• other publication id: 07/5269
• language: Swedish
• id: 1981098
• date added to LUP: 2011-06-20 15:58:30
• date last changed: 2011-06-20 15:58:30