Valuation for Corporate Finance

BUFN 750

Airbus A3XX: Developing the worlds largest commercial jet

Prepare a memo answering the following questions:
1. Why is Airbus interested in building the A3XX? What are its objectives?
2. How many aircraft does Airbus need to sell per year in order to make a profit
on the investment? Is this number greater or less than your estimate of total
demand for very large aircraft (VLA) over the next 20 years?
Hint: Consider all capital providers as a single entity and calculate the NPV (this
means that you may assume that it is an all equity firm). To calculate the number
of planes per year, find the present value of the following cash flows:

Find the cash flows of the required investment during the ramp-up period of
development.

During the ramp-up period, assume that any planes sold are sold at cost (we
know they are sold at a discount until they are in full production).

Once they are at full production (in 2008), the rest of the cash flows will be a
growing perpetuity where the flows are made up of two parts:
o Flows that are not dependent on the number of planes sold.
o Flows that are dependent on the number of planes sold.
o Assume that planes are now sold at full price.

Our goal is to find the number of planes that they need to build per year so that
the project is profitable (has a positive NPV). The reason that sales grow is not
going to be because they sell more planes, but because of inflation. If some costs
dont grow, you may want to break the cash flow into two parts one that grows,
one that does not. Be careful about CapEx and Depreciation in 2008. You want
to include these in the growing perpetuity, but do not want to double count them.
You may assume that straight-line depreciation over ten years.
Please assume an equity risk premium of 6% for all your analysis.
3. How should Boeing respond to this situation? How does your answer depend
on what you think Airbus is likely to do? (No calculation required)
4. Should Airbus commit to build the A3XX? How many orders should Airbus
have before committing to develop the plane?