Simplified Valuation Analysis for the Airbus A3XX

Note: The yellow cells are assumptions (inputs) into the discounted cash flow (DCF) model. The blue cells are
are the results (output) from the model.

Key Assumptions as of 2008

Price per Plane
$225
Number of Planes
48
Operating Margin
25.0%

Discount Rate Assumptions (a)

Risk-free Rate
6.0%
Asset Beta
0.84
Risk Premium
6.0%
Discount Rate 11.0%

in millions

General Assumptions as of 2000

Inflation Rate
2.0%
Tax Rate
38.0%

Results from the Model

NPV = $3,555
After-tax IRR = 22.7%
Pre-tax IRR = 26.1%
# planes sold by 2019
624
Capacity Constraint Violated?
No

Required Investment as of 2000 ($millions)

Research & Development $11,000
Capital Expenditures
$1,000
Working Capital
$1,000

Required Investment (Ex. 10)

Research & Development
Capital Expenditure
Working Capital
Cumulative Investment
Research and Dvlp
Capital Expenditures
Working Capital

2002

2003

2004

2005

2006

$1,100
$0
$0
$1,100

$2,200
$250
$150
$2,600

$2,200
$350
$300
$2,850

$2,200
$350
$300
$2,850

$1,320
$50
$200
$1,570

$880
$0
$50
$930

$1,100
$0
$0

Cash Flows (b)

Revenue
Number of Planes
Price per Plane
Operating Profit
Development Costs
R&D Expense
Depreciation (c)
Depr. Adjustment (d)
EBIT
Taxes (e)
@
38%
EBIAT
+ Depreciation (f)
- Capital Expenditures (f)
- Incr. in Working Capital (g)
Free Cash Flow
Discount Rate
Discount Factor

2001

$3,300
$250
$150

$5,500
$600
$450

$7,700
$950
$750

$9,020
$1,000
$950

$9,900
$1,000
$1,000

$2,595
12
$216
$649
($1,100)
$0
$0
($1,100)
$418
($682)

($2,200)
($25)
$0
($2,225)
$846
($1,380)

($2,200)
($60)
$0
($2,260)
$859
($1,401)

($2,200)
($95)
$0
($2,295)
$872
($1,423)

($1,320)
($100)
$0
($1,420)
$540
($880)

($880)
($100)
$100
($231)
$88
($143)

$0
$0
$0
($682)

$25
($250)
($150)
($1,755)

$60
($350)
($300)
($1,991)

$95
($350)
($300)
($1,978)

$100
($50)
($200)
($1,030)

$100
($100)
($50)
($193)

0.901

0.811

0.730

0.658

0.592

0.533

11.0%

Terminal Value (Growing Perpetuity)

Growth rate (h)
2.0%
Total Free Cash Flow
Discounted FCF
Present Values
FCF 2001-08
Terminal Value
Net Present Value
Internal Rate of Return

($682)
($614)

($1,755)
($1,423)

($1,991)
($1,454)

($1,978)
($1,301)

($1,030)
($610)

($193)
($103)

($4,522)
$8,077 for 2009 and beyond
$3,555
22.7%

after tax

Notes:
a) The discount rate is the unlevered (all equity) cost of capital = Rf + bA*RP = 6% + (0.84*6%) =11.0%
b) The cash flows ignore the tax impact of launch aid, which is technically taxable when received. They also ignore
cash flows associated with pre-payments and progress payments for planes. Most assumptions are from case p. 8.
c) Assumes 10-year straight-line depreciation until 2005, then a maintenance level where depreciation equals new capital expe
new capital expenditures.
d) Because operating profit is net of depreciation expense, it must add it back after 2006 to avoid double counting.
e) Assumes Airbus Integrated Company (AIC) can use the tax losses incurred in current year.
f) Assumes depreciation equals capital expenditures after 2005.
g) Assumes net working capital grows at inflation after 2006.
h) The terminal value growth rate equals the inflation rate. The terminal value in 2008 is equal to:
TV08 = FCF09 / (discount rate - inflation rate)

Pre-tax IRR Calculation

2001
2002
2003
2004
2005
2006
2007
2008
2009

EBIT
($1,100)
($2,225)
($2,260)
($2,295)
($1,420)
($231)
$1,330
$2,260
$2,754

TV Total CF
($1,100)
($2,225)
($2,260)
($2,295)
($1,420)
($231)
$1,330
$2,260
$31,074 $33,828

The blue cells are

umptions (a)
10-year US Treasury yield (p. 8)

= KE = WACC if all equity

Max = 48 planes/year

2007

2008

2009

$660
$0
$0
$660

$440
$0
$0
$440

$0
$0
$0
$0

$10,560
$1,000
$1,000

$11,000
$1,000
$1,000

$11,000
$1,000
$1,000

$7,961
36
$221
$1,990

$10,800
48
$225
$2,700

$11,016
48
$230
$2,754

($660)
($100)
$100
$1,330
($506)
$825

($440)
($100)
$100
$2,260
($859)
$1,401

$0
($100)
$100
$2,754
($1,047)
$1,707

$100
($100)
($20)
$805

$100
($100)
($20)
$1,381

$100
($100)
($20)
$1,687

0.480

0.433

0.390

$18,667

$805
$387

$20,048
$8,674

ed. They also ignore

assumptions are from case p. 8.
eciation equals new capital expenditures.

oid double counting.

Airbus A3XX: Developing the World's Largest Commercial Jet

Harvard Business School Case 9-201-028

Copyright 2001 by the President and Fellows of Harvard College

Professor Benjamin Esty prepared this software to assist with class discussion rather than
to illustrate either effective or ineffective handling of an aministrative situation.