Mba Student
Airbus A3XX:
Developing the World’s Largest Commercial Jet
How will the project be financed?
• $5.9 billion from internal equity • $3.5 billion from “risk-sharing partners” • $3.6 billion from “launch aid” • Total: $13.0 billion
1
Cost of capital
• k = rf + β (rm – rf) • rf = .06 β = .84 (rm – rf) = .06 (page 8) (page 8) (given)
• k = .06 + .84 (.06) = .1104 ≈ 11%
What if the launch aid is “free?”
• Cost of capital = $9.4 billion @ 11% $3.6 billion @ 0% $13.0 billion @ 8%
2
Initial investment
R&D 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ($1100) (2200) (2200) (2200) (1320) (880) (660) (440) Tax shield $418 846 846 846 502 334 251 167 CAPX Tax shield $0 10 23 36 38 38 38 38 38 38 38 29 15 2 Working Capital Total ($628) (1755) (1991) (1978) (1030) (558) (371) (235) 38 38 38 29 15 2 ($250) (350) (350) (50) ($150) (300) (300) (200) (50)
Discount outlays @11% and tax shield inflows @6%. Tax rate = 38% (page 6). NPV = ($9.0 billion) outlays + $3.6 billion tax shields = ($5.4 billion) Government pays $3.6 billion in launch aid, plus the $3.6 billion in tax shields
Depreciation tax shields
Depreciate annual amounts over 10 years 38% x total =
Annual 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ($250) (350) (350) (50)
2002
2003
2004
2005 Total $0 (25) (60) (95) (100) (100) (100) (100) (100) (100) (100) (75) (40) (5)
Tax shield $0 10 23 36 38 38 38 38 38 38 38 29 15 2
($25) (25) ($35) (25) (35) ($35) (35) (35) (25) (35) (35) (25) (25) (35) (35) (25) (35) (35) (35) (25) (35) (25) (35) (35) (25) (35) (35) (35) (35) (35)
($5) (5) (5) (5) (5) (5) (5) (5) (5) (5)
3
Operating earnings
• Price per plane: $225 million • Operating profit (earnings): 20%
15%? 30%?
• Tax rate: 38% • Output per year: 50
(“just over 4 per month”)
Annual cash flow: $225 x 50 x .20 x (1-.38) = $1.4 billion
What is the revenue stream worth?
• Assume 50 aircraft / year beginning
Developing the World’s Largest Commercial Jet
How will the project be financed?
• $5.9 billion from internal equity • $3.5 billion from “risk-sharing partners” • $3.6 billion from “launch aid” • Total: $13.0 billion
1
Cost of capital
• k = rf + β (rm – rf) • rf = .06 β = .84 (rm – rf) = .06 (page 8) (page 8) (given)
• k = .06 + .84 (.06) = .1104 ≈ 11%
What if the launch aid is “free?”
• Cost of capital = $9.4 billion @ 11% $3.6 billion @ 0% $13.0 billion @ 8%
2
Initial investment
R&D 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ($1100) (2200) (2200) (2200) (1320) (880) (660) (440) Tax shield $418 846 846 846 502 334 251 167 CAPX Tax shield $0 10 23 36 38 38 38 38 38 38 38 29 15 2 Working Capital Total ($628) (1755) (1991) (1978) (1030) (558) (371) (235) 38 38 38 29 15 2 ($250) (350) (350) (50) ($150) (300) (300) (200) (50)
Discount outlays @11% and tax shield inflows @6%. Tax rate = 38% (page 6). NPV = ($9.0 billion) outlays + $3.6 billion tax shields = ($5.4 billion) Government pays $3.6 billion in launch aid, plus the $3.6 billion in tax shields
Depreciation tax shields
Depreciate annual amounts over 10 years 38% x total =
Annual 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ($250) (350) (350) (50)
2002
2003
2004
2005 Total $0 (25) (60) (95) (100) (100) (100) (100) (100) (100) (100) (75) (40) (5)
Tax shield $0 10 23 36 38 38 38 38 38 38 38 29 15 2
($25) (25) ($35) (25) (35) ($35) (35) (35) (25) (35) (35) (25) (25) (35) (35) (25) (35) (35) (35) (25) (35) (25) (35) (35) (25) (35) (35) (35) (35) (35)
($5) (5) (5) (5) (5) (5) (5) (5) (5) (5)
3
Operating earnings
• Price per plane: $225 million • Operating profit (earnings): 20%
15%? 30%?
• Tax rate: 38% • Output per year: 50
(“just over 4 per month”)
Annual cash flow: $225 x 50 x .20 x (1-.38) = $1.4 billion
What is the revenue stream worth?
• Assume 50 aircraft / year beginning