Hong Kong Dragon Airlines Limited B Lease vs Buy Decision Case Solution

Hong Kong Dragon Airlines Limited B Lease Vs Buy Decision Case Solution

Hong Kong Dragon Airlines Limited B Lease vs Buy Decision Case Solution

Hong Kong Dragon Airlines Limited B Lease vs Buy Decision Case Solution

In the beginning of 2006, the Hong Kong Dragon Airlines ("Dragonair") formed a project team to assess different ways to switch and substitute a standby engine. The possible options included either to buy the engine directly or to contract an engine through a direct lease or a sale-and-leaseback arrangement. In order to evaluate the lucrativeness of each possibility, the project team first need to decide an optimal discount rate to use.

Excel Calculations

 Return Conditions- Flight Hours, Flight Cycles, Life of the Engine, Remaining Life

Senstivity to WACC (Up)- Purchase, NPV, Sale and Lease Back, Cash Flows, PV

Senstivity to WACC (Down)- Purchase, NPV, Sale and Lease Back, Cash Flows, PV

Senstivity to Purchase Price (Up)- Purchase, NPV, Sale and Lease Back, Cash Flows, PV

Senstivity to Purchase Price (Down)- Purchase, NPV, Sale and Lease Back, Cash Flows, PV

Questions Covered

Executive Summary

What are the after-tax cash flows relevant to the purchase option and what discount rate should be used for those cash flows?

What are the after-tax cash flows relevant to the sale-and-leaseback option and what discount rate should be used for those cash flows?

What are the pros and cons of each option given in the case?

Perform sensitivity analysis to identify the key bets/assumptions in your decision.

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