Global Airlines Harvard Case Solution & Analysis

1.      Main real option embedded in the case

The main real option in this case is the three project methodology. In the first stage of this approach, five data mart will be consolidated. Between each of the projects there will be a stage gate review to figure out whether the consolidation ought to proceed or not. There will be a stage gate review after the initial five data mart consolidated; which will confirm that whether the first project in the three project methodology is fruitful or not. The data that is gathered in this stage gate review procedure will permit Global Airlines to settle on choice identified with the continuation of the task. It will help the company to make successful choice about whether to proceed with the second project in the three project methodology or not. On the off chance that the first project passed the stage gate review, the extra five data marts will be combined in the second project. At last, the last five data marts will be united in the last project in the three project scenario if the second project passed the stage gate review.

The point of interest that the airline company can have in utilizing this technique is that there is a lower risk involved because of the injuries gained from the first project implies that sending team of the projects can learn as it experienced the project and make modification as needed. The weakness of utilizing this system is that the consolidation will not be profited from the economies of scale and will cost more to the Global Airlines.

2.      Traditional NPV analysis

The project given in the case will get accepted if its NPV is positive or else it will be rejected. In case of multiple projects with positive NPV, the one with the higher NPV will be selected. Furthermore, if IRR of the project is greater than cost of capital (WACC) then it should be accepted because it means that rate of return of the project is greater than the cost of the capital invested in the project.

Big Bang Approach

According to the Exhibit 8, Big Bang project’s traditional NPV is a positive value which is $987,263. The IRR for the big bang project is 16.80% while the weighted average cost of capital (WACC) for Global Airlines is 14%. The positive value of traditional NPV and IRR greater than cost of capital shows that the Global Airlines should accept the big bang project.

By accepting this project, the company will get cost savings from the economies of scale but attempting all fifteen data marts at once will result in increased risk.

Two Project Approach

According to the Exhibit 8, NPV of the first project in the two project approach is negative that is -$ 98,400 and the NPV of the second project is positive with the value $1,079,742 that gives a total positive NPV of $981,342. The IRR of the first project is 13.2% that is lower than cost of capital (WACC) of 14%, and the IRR of the second project is 18.6%; which is higher than the cost of capital of the Global Airlines.

By accepting the two project approach, Global Airlines will be profited from the lower risk because of the lessons learned from the first project. But by using this project, Global Airlines will not benefit from the economies of scale...................................

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