182 Corporate Finance
Step 6
Deduct the value of initial investment to arrive at NPV. One might calculate IRR given a forecast of free cash
flows and initial investment.
The viability of an airport depends primarily on domestic and international traffic. Exhibit 9.1 presents
the number of passengers carried since 1992. As can be seen, the number of passengers carried is decreasing.
Exhibit 9.1 All passengers carried since 1992 in the domestic sector
Year Total domestic (million) Growth (percent)
1992 8.47 5.1
1993 8.84 4.3
1994 10.51 18.9
1995 11.98 14.0
1996 11.01 (0.6)
1997 11.51 (3.3)
1998 11.86 1.9
Source: India Infoline.
One study found that the international traffic is expected to grow at 6.88 percent at Mumbai, 10.69 percent
at Thiruvananthapuram and 12.36 percent at Chennai airports; the weighted average for all airports being
8.1 percent.
Kochi has the potential to develop into a maintenance and refueling base due to its geographic location.
The runway and terminal facilities at Thiruvananthapuram are inadequate. Further, the Kerala-bound traffic
at Mumbai is estimated to be 5.9 percent, of which 65 percent is Kochi bound, and 25 percent of traffic
handled at Thiruvananthapuram is Kochi bound. Likewise other airports at Chennai, Bangalore and Hyderabad
also handle Kerala-bound traffic. All these factors led to the conclusion that there is a need for an international
airport at Kochi.
Development of any project involves the following steps:
- Preparation of techno-economic feasibility
- Site selection
- Formation of a company
- Statutory clearance
- Acquisition of land
- Presentation and discussion with financial institutions for funding
- Invitation and finalization of bids for civil works
- Tendering and award of electrical works
- Commissioning and testing
- Commercial operation
FINANCIAL EVALUATION
Common sense suggests that a project should generate adequate revenues to be financially viable. Airports
generate revenues from two sources: traffic and non-traffic. Traffic revenue comes from: