Strength and weaknesses of NPV analysis and its application to aircraft value modeling

The purpose of this study is to analyze the Net Present Value (NPV) technique as a mean to forecast aircraft values and the analysis of aircraft value forecasting accuracy. The main part of the examination is the evaluation of the actual quality of aircraft appraisals. The appraisal evaluation is based on historical forecast accuracy determinations and on a comparison of 1998 aircraft value forecasts. The discussion of a survey conducted by the author in 1998, will reveal the disunity among the appraisers. The survey data was provided generously by the appraisers most recognized in the industry. A sensitivity analysis exhibits how strongly the NPV technique, which is widely used in order to determine aircraft values, is influenced by certain input variables. Furthermore, in this paper the importance of aircraft value forecasting and factors determining aircraft values will be discussed. Different forecasting techniques, currently used in the appraisal industry, will be explained and aircraft value forecasting results of Credit Lyonnais/PK Airfinance (CL/PK) and Avitas will be analyzed in regard to their accuracy. The main findings were that forecast accuracy is poor for most aircraft, a high disunity among appraisers regarding current market values and finally that NPV results can differ significantly if assumptions in a model are changed slightly. In addition, possible suggestions on how to improve current models will be explained in the conclusion.