Airbus Case

The airbus want to produce an aircraft to compete with Boeing's 747 in the very large aircraft (VLA), in order to gain financial success to become the world leading producer of commercial aviation industry.

2.1

Set up three-stage cash flows according to ramp-up period, full production period and growing perpetuity period from 2011. Ramp-up began from 2001 to the end of 2007.

Use CAPM model to estimate discount rate. (6%+0.84*6% = 11.04%)

The cash flows from 2001 to 2008 were calculated using 〖FCF〗_t= operating profit - R&D Expenditure – Tax expense – Capex – ∆ net working capital + depreciation. (See details in Appendix)

PP&E depreciates using straight-line over ten years, 100 million per year. Based on this condition, the depreciation cannot be completed until 2010. So we consider 2008 to 2010 as a separate stage, full production stage.

After 2011, the rest of the cash flows will become growing perpetuity. When airbus is at growing perpetuity from 2011, assume that the growth rate is the inflation rate 2%.

periods year PV

Ramp-up 2001--end of 2007 ∑_(t=1)^7▒FCF_t/(1+11.04%)^t

Full capacity 2008--2010 ∑_(t=8)^10▒FCF_t/(1+11.04%)^t

Growing perpetuity 2011-- ((〖FCF〗_10 (1+g))/(r-g))/〖(〖1+11.04%)〗^10〗^

Conduct a sensitivity analysis by changing net profit margin from 2008.

Profit margin 15% 18% 20%

Quantity of A3XX ≥49 ≥41 ≥37

2.2

We use Airbus' method (From Exhibit 8 in the case) to estimate the whole VLA market by 2019.