Break-Even Point of Industry

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BUFN 750 Valuation for Corporate Finance|
Case #1 Airbus A3XX|
Developing the World’s Largest Commercial Jet
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1. Airbus’ Interests & Objectives
First of all, the large and cost-efficient A3XX would be popular with significant growth in the air transportation industry. Worldwide passenger traffic would almost triple in volume by 2019, with fuel price rising in the future. Creating large and cost-efficient aircrafts, rather than increasing frequencies and building new routes, would be the long-term solutions to the problem of growing demand. Therefore, this project will be strategically significant. Secondly, Airbus wants to gain market shares in the VLA market and break up the monopoly of the 747, but it didn’t have a product to compete with Boeing’s 747. Compared to the 747, the A3XX provides more advantageous features which would attract passengers especially on the longer routes, such as more space per seat, four-engine plane, etc. The combination of increased capacity and reduced costs would provide superior economics. Airbus felt confident that capacity increases would eventually prevail. As we stated above, Airbus’s objectives are to break up the monopoly of the 747, to increase its market share in the VLA market, to gain enormous financial success and to be an industry leader. 2. Break-Even Point & Market Demand

Production will be able to reach full capacity from 2008, with order and delivery assumed on a stable level. During this period, the capital expenditure will be offset by depreciation in calculation of free cash flow, and R&D will be included in the operating margin. The company, as assumed, will produce and deliver 22 aircrafts for the airlines which have ordered, with 6 in 2006 and 16 in 2007. Since $700 million would have already been spent before the decision, this amount of investment should be treated as sunk cost, therefore irrelevant to the NPV analysis. To break even, with assumed operating...
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