Global Airlines Harvard Case Solution & Analysis

Q3: What is the main real option embedded in this case?

The main real option embedded in the scenario is the sequencing option, which is being considered by the Global Airlines and to be specific it is considering the consolidation of its data marts into an oracle based enterprise solution and for doing this consolidation Global Airlines has the option to deploy the consolidation of its fifteen data mart. In the first stage of consolidation, Global Airlines will consolidate its first five data marts and it will review the results of first consolidation and the next consolidation will only be carried out if the results of first consolidation are satisfactory. The information obtained from first stage of consolidation will help to establish the failure or success of the first consolidation, however, successful implementation of first stage consolidation will lead to the second stage consolidation of data marts and the procedure will continue until all three consolidation processes has been completed. Additionally, if any of the consolidations stage fails to get the desired outcome, then the project will not be continued.

However, using the option in data marts consolidation will help Global Airlines to eliminate or reduce the risk of failure of the entire project because the result of the first stage will let the management decide about the next stage and management will only go to the second stage of data marts combination if the first stage’s results are satisfactory and the management will be able to adjust the process and methodology involved in data mart consolidation, which will provide the flexibility to Global Airlines. Meanwhile, this approach has some shortcomings that consolidation of the entire data mart at once will generate large scale economy benefit; which will not be available if a step by step approach is followed.

Q4: Sketch the possible strategies using a decision tree (no need for calculations here, just a sketch of the options as this will help you to model it)

Decision Tree

Q5: Do a conventional NPV analysis.

As discussed above, the project should be evaluated on the basis of positive NPV and in case of alternative projects, only that project should be selected which generates highest NPV.

SCENARIO 01

Based on the analysis, NPVs of the big bang approach generates positive NPV of $987,263/- and the WACC of Global Airlines is 14% in comparison to the project Big Bang that yields internal rate of return of 16.80%; which is quite low that makes the project more attractive. Therefore, on the basis of positive NPV and higher IRR, big bang project should be selected.

SCENARIO 02

On the other hand, two project approach generates negative NPV of ($98,400)/- in the first project, which is flowed by positive NPV of $1,079,742/- from the second project, meanwhile, overall net present values of two project approach is $981,342/- that is still positive. In the meantime, the average internal rate of return yielded by two project approach is quite greater than the WACC of Global Airlines; therefore, the project is profitable and can be preceded.

SCENARIO 03

Moreover, the three project approach generates negative NPV of ($98,400)/- in the first stage of project, followed by a positive NPV of $409,157/- and finally the last stage of the project generates a negative NPV of ($268,689)/- and overall the project generates positive NPV of $42,068/-. Additionally, the three project approach generates an average internal rate of return that is high enough than the WACC of Global Airlines; which makes the project worthwhile. Therefore, the project can be accepted on the basis of total positive NPV of $42,068/-.

However, based on the NPV analysis, big bang approach generates higher NPV of $987,263/- and it suggests that this project should be selected out of the three alternates.......................................

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