Mr.

Corporate Finance: NPV for Airbus Projects

The decision to commit to a huge investment of $13B to develop the Airbus A3XX super jet should not be

taken lightly. There are many issues to consider regarding the profitability of the project. Firstly, there are

conflicting projections of the market demand from Airbus and Boeing, which could lead to dramatic

differences in the demand for Very Large Aircraft (VLA) and ultimately the number of planes sold. We

must also consider the growth rate of the industry, the riskiness of the project, the ability to use the tax

credits accumulated during initial development, and currency exchange rates since most plane sales are

priced in US dollars.

Based on careful review of all factors, we recommend that EADS move forward and develop the Airbus

3XX aircraft. We used Net Present Values (NPV) and looked at how variability in the main issues affects

that value as the principal indicator of the value of the project. Given the projections of demand, costs,

and timeline we found a NPV of $3.55B and then measured the effect of change in several of the key

assumptions.

The main advantages of the project are the huge payout if it goes as planned, solid growth rates in the

airline industry, and the risk sharing with partners and governments. The government launch aid works

similar to debt with very favorable interest rates (market rate) to be paid over 17 years, but with the

added benefit of not having to pay back if the project is unsuccessful. This will lead to a higher net IRR as

the government will not share in the profits.

Some of the arguments against the project include Boeing's lower estimate of the market demand for VLA.

Although they make a valid argument, we feel that they ignore constraints such as airport capacity that

limit flight frequency. Furthermore, they made a claim that 40% of VLA purchases were for range. This

implies that 60% purchased for "other reasons." There are not many reasons for purchasing VLA other

than range and seating capacity.

We looked closely at all of the issues affecting profitability and concluded that the main issues were

currency rate fluctuations, the increased riskiness of this project over past projects, and total demand.

The following chart exemplifies how changes in each of these would affect the NPV of the project.

Currency Rate

Fluctuations

Risk Premium Demand

New NPV

New Sell

Price New NPV

New Risk

Prem.

New

NPV

Planes

Sold

10% Change

$2,584

230

$2,795 6.6%

$2,584

43

20% Change

$1,614

204

$2,320 7.2%

$1,614

38

30% Change

$644

179

$1,810 7.8%

$644

34

40% Change

$(327)

153

$1,362 8.4%

$(327)

29

We also found no significant value in delaying the project. Boeing has much to gain by Airbus' decision to

delay the project, yet the market forecasts are not going to change significantly in the short‐term.

We believe that Airbus has created a superior forecasting model. Within the VLA market, only Boeing's

747 and 777 aircraft are competitors. They currently average 46 and 52 aircraft sales respectively per year.

Calculating 4.8% growth, by 2008 when Airbus expects to be at full production those demand numbers will

have grown to 70 and 79, respectively. Furthermore, Boeing claims that 40% of its customers purchased

for the range of the aircraft. This implies that 60% purchased for the seating capacity or other reasons and

the Airbus 3XX meets or exceeds the range