Case_1_Group_8_WNG_Final
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The cashflows for WNG over a a 4 year period were calculated for the re-lease of the aircraft after expiry
(Exhibit 1), and selling the aircraft after expiry (Exhibit 2). For both cases, $12,850,000 was used as the
initial investment (original price of $15 million adjusted for the penalties for the unserviceable engines
of $0.75 million and missing trace of $1.4 million). The 12 month period of cashflows are shown in
Exhibit 3. We also conducted a sensitivity analysis to investigate the cashflows further.
According to the sensitivity analysis of value for WNG, the purchase price significantly affects the deal
NPV, as the present value of the purchase price is initial investment, it wouldn’t be affected by discount
rate. Besides, the large value of the purchase price determined that it would change the cash flow in a
large extend. On the other hand, the high required rate is a key input for calculating the NPV and also
related to the creditworthiness and financial situation of the lessee, which decided that it is another
critical assumption for the deal (see Exhibit 4).
Based on the cash flow, we learnt that if WNG decide to re-lease aircrafts after expiry, they had 80%
chance to make the deal and the adjusted NPV would be $722,539. But if WNG choose to sell aircrafts
after expiry, they had 20% chance to sell it and the adjusted NPV would be $68,691. Combining these
two options, the deal NPV would be $591,770. So WNG should go ahead with the transaction anyway,
no matter which option they would choose after expiry.
On the other hand, the airline company’s cash flow mirrors that of WNG. The revenue is not considered
in this case as only the project NPV is focused on. The airline company had an NPV of $7,831,309 for the
first-year transaction and $442,432 for the transactions over the four-year period, which is positive (see
Exhibit 6). However, the NPV is expected to be negative, considering the airline company has to
continuously pay for rent expenses to maintain future operating activities. Nevertheless, the negative
NPV is not to be a concern in this case because there is an expected growth rate of 4.5% for the aviation
industry from 2011 to 2030. So the NPV of the airline company’s total cash flow was expected to be
positive if we assume the revenue is to increase. We can therefore conclude that this transaction is also
attractive to the airline company.
One variable we need to consider in the analysis of this transaction for the airline company is the
required return rate. Unlike WNG, the airline company had less concern regarding the other party’s
creditability, and there were fewer risks to tolerate regarding this transaction. The airline company
should have a lower required return rate because of this reason. Referring to Exhibit 7, a sensitivity
analysis shows that NPV decreases while using a lower required return rate to process NPV. In this case,
the transaction could be less attractive to the airline company if we focus on decreasing NPV. Generally
speaking, however, it is a profitable agreement for both WNG and the airline company
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