Giddy | Grupo TacaL Valuaing a Lease

Case study
Grupo Taca: Valuing a Lease

Prof. Ian Giddy, New York University

Grupo Taca
Founded in 1931 by a New Zealand pilot of the Royal Canadian Air Force named Lowell Yerex, "Transportes Aéreos Centroamericanos" (TACA) started operations in Tegucigalpa, Honduras with one airplane and a contract from the Honduran government to transport goods. By 2006 Grupo Taca had expanded through acquisitions, providing passenger and cargo services to Central and South America in a strong multi-national alliance, from New York to Santiago, Chile.

Projected Cash Flows
In May 2006, Grupo Taca decided to expand its Central American cargo business. This was to be done by leasing 4 Airbus A300s from Den Lage Landen, an Eindhoven-based leasing company. The terms of the lease were simple: 12 annual payments of $9 million. The first payment would be made upon delivery, and the remaining payments at 12 month intervals thereafter. At the end of the 12th year the aircraft would be returned to DLL. The leasing company would purchase the equipment for $60 million from Airbus Industrie, which agreed to repurchase the aircraft for $8 million after 12 years.

Questions
1. From Grupo Taca's point of view, this lease contract is effectively a debt obligation. Taca's normal long-term borrowing cost is 9% p.a. What is the present value of the company's lease obligation?
2. Den Lage Landen has a weighted average cost of capital of 11%. The return on every leasing transaction must exceed this WACC by at least 1%. Does the internal rate of return (IRR) on the Taca lease exceed this hurdle?