To evaluate whether the Airbus should undertake the A3XX project, we’d like to construct a model and employ NPV, IRR and undiscounted payback period decision rules. We will also conduct sensitivity analysis to find out how factors would impact on the profitability of the project in order to make an overall conclusion.
The time period covered in our analysis is 20 years, from 2001 to 2021.
First step, we use the basic assumptions estimated by Airbus itself to calculate each year’s free cash flow, then project’s NPV, IRR and payback period.
Second step, we challenge each key input in the model and conduct the sensitivity analysis to come to a conclusion.
Key inputs and assumptions
1) Payment and cash inflow
We assume that Airbus receives 20% of the total payment when airlines order planes and receives the rest 80% of total payment when the planes are delivered to airlines.
2) Total demand and realized sale price
We first use the estimation from Airbus who states the total demand in 20 years will be 750 units of planes. To locate specific demand in each year, we assume that there is a constant growth per year in demand till 2021. Then, by using Solver in Excel, we get the specific number of demand in each year.
The average price per plane we use for analysis is $225,000,000, which is explicitly indicated in the case material.
Airbus delivers the first plane in 2006 and is capable of producing up to 50 planes per year (4+*12~=50) starting from 2008. We assume that in 2006 and 2007, Airbus can delivery 15 planes and 35 planes respectively.
4) Financing and discount rate
Of the $13 billion investment, $5.9 billion will come from Airbus partners themselves, $3.6 billion from government launch aid, and $3.5 billion from Risk Sharing Partners. Though Airbus regards government launch aid as a debt, it is more like a preferred stock for financial analysis purpose. Therefore, we use CAPM to calculate the proper discount rate: