Airbus B-E Analysis Model

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.