Break-even analysisSimplified Valuation Analysis for the Airbus A3XXNote: The yellow cells are assumptions (inputs) into the discounted cash flow (DCF) model. The blue cells areare the results (output) from the model.Key Assumptions as of 2008Discount Rate Assumptions (a)Price per Plane$225in millionsRisk-free Rate6.0%10-year US Treasury yield (p. 8)Number of Planes48Asset Beta0.84Operating Margin25.0%Risk Premium6.0%Discount Rate11.0%= KE = WACC if all equityGeneral Assumptions as of 2000Inflation Rate2.0%Results from the ModelTax Rate38.0%NPV =$3,555After-tax IRR =22.7%Required Investment as of 2000 ($millions)Pre-tax IRR =26.1%Research & Development$11,000# planes sold by 2019624Capital Expenditures$1,000Capacity Constraint Violated?NoMax = 48 planes/yearWorking Capital$1,000200120022003200420052006200720082009Required Investment (Ex. 10)Research & Development$1,100$2,200$2,200$2,200$1,320$880$660$440$0Capital Expenditure$0$250$350$350$50$0$0$0$0Working Capital$0$150$300$300$200$50$0$0$0$1,100$2,600$2,850$2,850$1,570$930$660$440$0Cumulative InvestmentResearch and Dvlp$1,100$3,300$5,500$7,700$9,020$9,900$10,560$11,000$11,000Capital Expenditures$0$250$600$950$1,000$1,000$1,000$1,000$1,000Working Capital$0$150$450$750$950$1,000$1,000$1,000$1,000Cash Flows (b)Revenue$2,595$7,961$10,800$11,016Number of Planes12364848Price per Plane$216$221$225$230Operating Profit$649$1,990$2,700$2,754Development CostsR&D Expense($1,100)($2,200)($2,200)($2,200)($1,320)($880)($660)($440)$0Depreciation (c)$0($25)($60)($95)($100)($100)($100)($100)($100)Depr. Adjustment (d)$0$0$0$0$0$100$100$100$100EBIT($1,100)($2,225)($2,260)($2,295)($1,420)($231)$1,330$2,260$2,754Taxes (e)@38%$418$846$859$872$540$88($506)($859)($1,047)EBIAT($682)($1,380)($1,401)($1,423)($880)($143)$825$1,401$1,707+ Depreciation (f)$0$25$60$95$100$100$100$100$100- Capital Expenditures (f)$0($250)($350)($350)($50)($100)($100)($100)($100)- Incr. in Working Capital (g)$0($150)($300)($300)($200)($50)($20)($20)($20)Free Cash Flow($682)($1,755)($1,991)($1,978)($1,030)($193)$805$1,381$1,687Discount Rate11.0%Discount Factor0.9010.8110.7300.6580.5920.5330.4800.4330.390Terminal Value (Growing Perpetuity)$18,667Growth rate (h)2.0%Total Free Cash Flow($682)($1,755)($1,991)($1,978)($1,030)($193)$805$20,048Discounted FCF($614)($1,423)($1,454)($1,301)($610)($103)$387$8,674Present ValuesFCF 2001-08($4,522)Terminal Value$8,077for 2009 and beyondNet Present Value$3,555Internal Rate of Return22.7%after taxNotes: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 ignorecash 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 expenditures.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 CalculationEBITTVTotal CF2001($1,100)($1,100)2002($2,225)($2,225)2003($2,260)($2,260)2004($2,295)($2,295)2005($1,420)($1,420)2006($231)($231)2007$1,330$1,3302008$2,260$2,2602009$2,754$31,074$33,828

CopyrightAirbus A3XX: Developing the World's Largest Commercial JetHarvard Business School Case 9-201-028Copyright 2001 by the President and Fellows of Harvard CollegeProfessor Benjamin Esty prepared this software to assist with class discussion rather thanto illustrate either effective or ineffective handling of an aministrative situation.

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