HSI is also interested in the transport sector and has identified Waw Air (WAW) which is a UAE based private company that operates a range of transport solutions across the GCC region. [Note: SCT is a fictitious company, created for the purpose of this assignment].

WAW has published its 2023 - 2028 strategy and it intends to become a major player in the short- to medium-range air travel sector within the Middle East region. 

During the due diligence process, HSI has learned that WAW is interested in expanding its operations in the UAE with new routes from Abu Dhabi airport to some popular destinations in Asia. Indeed, it has identified an opportunity to invest in the route Abu Dhabi – Samarkand (a historical city in south-eastern Uzbekistan). The project is based on a market survey which showed an increased interest for cultural travel within the UAE population.

The project will involve the purchase of one plane that will service the route and establish a base at Abu Dhabi airport. 

The Government requires all airlines to purchase a licence to fly routes out of Abu Dhabi airport. These liences are open to auction. The licence cost will be a one off payment and WAW will need to submit a bid for it.

The cost of the licence will be paid to the Government in two instalments: 80% of the total amount bid is due at the start of the project (in 2023), and the balance of 20% is due to be paid at the end of the third year of the project (in 2026).

For this new project, WAW will need to invest AED 620 million on a new aircraft and relevant infrastructure (i.e. maintenance depot, offices, etc). It will also need to use existing stock of spare parts for the aircraft that is currently sitting idle in one of its warehouses. The company’s finance department has estimated that WAW would be able to sell the parts for AED 75m if unused in the new project.

WAW will need to increase its working capital to meet the needs of the business by AED 60m at the start of the project.

Based on expected travellers’ numbers, frequency of services, ticket prices over the project period, operating cash flows over the five year operating period are presented below in Table 1. 

Table 1: Projected operating cash flows

Year		1	2	3	4	5
Pre-tax net operating cash flows	AEDm	125	216	236	315	340

Beyond Year 5, the company expects its pre-tax cash flows to grow at 1% per annum. 

WAW is mainly equity financed (70% of its capital) and has a total asset base of AED 5 billion. Its current cost of capital is 17% and it expects a minimum of 17% return on all its projects. The company’s policy is to achieve a four-year payback on its investments.

Question 2:  Your group is required to:     

1. Calculate the NPV of the project based on the WAW’s estimated cash flows and the government’s expected licence value. Show NPV including and excluding the terminal value. (15 marks)

2. Calculate the IRR of the project. (4 marks)

3. Calculate the payback period of the project by excluding the terminal value. (5 marks)

4. Based on the NPV and payback period you calculated, should WAW invest in the project? (4 marks)

5. Estimate the maximum price which WAW could pay for the licence in this new project in order to achieve its payback target and add value to its shareholders. Include terminal value in your estimate.  (2 marks)

    (Total 30 marks) 

Question 3: 

1. Explain whether it is better to base a decision to invest in WAW’s new project on the NPV method or Payback method – you need to explain the advantages and disadvantages of the two methods, which one would you recommend and why? (5 marks)

2. Discuss he risk factors faced by each investment proposition and which are likely to affect the value of each business. (5 marks)