Using the “Winning Edge Inc. Case Analysis as a review, answer the following questions and submit your answers following the directions below.

1. Given that each of the three corporate transportation alternatives covers a different length of time, what time period should be used to compare these options?

2. In constructing the cash flows associated with each option, how should the analyst treat The Winning Edge’s $250,000 expenditure for computer hardware and software to coordinate its executive travel schedule? Why?

3. In constructing the cash flows associated with the commercial airline contract option, should the analyst include (a) the average cost of coach tickets; (b) the cost of upgrading a coach fare to a first-class ticket; and/or (c) both of these ticket prices? Be sure to explain your answer. Additionally, indicate how each of these costs would appear in the capital budgeting analysis.

4. In constructing the cash flows associated with the commercial airline contract option, should the analyst include the lost time that The Winning Edge’s traveling executives spend waiting for connecting flights in airport terminals? If so, how should this time be represented in each year of
the capital budgeting analysis?

5. What is the annual depreciation expense that The Winning Edge’s may claim against taxable income under each of the three travel options?

6. Does each of the three travel options contain a different risk level? If so, how should the analyst incorporate this risk differential within the capital budgeting analysis? Be sure to also identify the appropriate discount rate necessary to evaluate each alternative in your answer. Further, explain your
selection of each particular discount rate.

7. Should the capital budgeting analysis include the forecast inflation rates shown in Table 1? If so, demonstrate how each of these inflation factors will affect the various cash flows in the capital budgeting analysis.

8. What is the net salvage value that The Winning Edge can expect to receive from (a) the aircraft purchase option (b) additionally. the aircraft time-share option?

9. Based on your answers to questions 1 through 8, prepare a schedule of corporate cash flows relevant to each of the three travel alternatives, and calculate the present value of total cost for each option. Furthermore, in developing the cash flows, assume that the capital expenditures necessary to fund a change in The Winning Edge’s corporate travel policy occur in the current period (Year 0), and all operating expenditures begin in the next fiscal year (Year 1).

10. In Question 9, should the analyst focus on before-tax or after-tax cash flows? Why?

11. The case mentions that The Winning Edge has enjoyed several years of growing profitability. How does this information also influence your answer to Question 10? If the case included information that led you to believe that The Winning Edge would suffer several years of financial losses over the next decade, how would this new information change your estimate of projected cash flows expected from each of the three travel alternatives?

12. In evaluating capital budgeting projects with different project lives, financial analysts often use a technique called the Equivalent Annual Annuity. Would this technique be useful in this case to evaluate the three travel alternatives? Why or why not?

13. Is Mike Cramer’s assessment of the risk level of each travel alternative sufficient justification for the financial analyst to apply different discount rates to each of the three travel alternatives? Why or why not?

14. All things considered, which of the three options should Mike select? Be sure to justify your answers on the basis of (a) your capital budgeting analysis of the three travel alternatives, and (b) lastly, the contextual information provided by the case.

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