Airbus A3XX: Developing the World’s Largest Commercial Jet
From its inception in 1970, Airbus has maintained a reputation for innovative design and technology. Airbus has employed a “fly-by-wire” technology on all of its planes as an efficient alternative to computerized control for mechanical linkages. In addition, Airbus streamlined operations and features that have lead to better pilot utilization and lower training costs. These advances help explain why Airbus had received over half of the total large aircraft orders for the first time in 1999. Although gaining market share, Airbus faced intense rivalry with The Boeing Company, whose unique importance in the US economy as a whole and rich history allowed it to become…show more content… Since the unlevered beta is known as 0.84, we can use debt-to-equity ratio of the project to find the levered beta for this investment, which would give us the return on equity of the project (11.6%). By looking up historical data on the Internet, we find the yield on long-term corporate bonds (rating A) in June 2000 is 7.9%. Using these numbers, we calculate the WACC to be 10.56%.
In calculating the cash flow, we use:
Price per plane * # of plane sold = Revenue
Revenue (1-operating margin rate) = operating margin
Operating margin – R&D expense – Depreciation = EBIT
*Here depreciation is only counted before 2006, since it would be reflected in operating margin after beginning production.
EBIT * (1-T) = EBIAT
EBIAT + depreciation – Capital expenditure – increase in working capital = unlevered free cash flow
Using these figures r(wacc) equals 10.56% and we therefore found the NPV of the A3XX investment to be negative $931 million (accounting for the initial cost of $700 million in 2000).
Similarly, we use the same EBIT as in the WACC calculation.
EBIT – B*rb = taxable income
Taxable income *(1-T) = NI
NI – Net capital expenditure – net working capital + new debt – debt repayment = free cash flow to equity
Using r(s) of 11.6% as the discounting rate, we get a net present value of negative $2.7 billion.