Based on the diagram above - and the information provided. Please Compute PV of investment cash flows using information on page 8 and Exhibit 10 (CAPM needed to compute discount rate; use 6% as a risk premium). Use 10% of cumulative CapEx for depreciation each year? (Please show formulas ) Exhibit 10 Airbus Development Expenditure by Year ($ millions) Investment 2003 2004 2005 2006 2007 2008 Total $1,100 $2,200 $1,320 $880 $660 350 R&D Expenditure Capital Expenditures Working Capital Total $2.200 250 150 $2,600 $2,200 350 300 $2,850 200 $1,570 $440 0 O $440 $11,000 $1,000 $1.000 $13,000 $1,100 $2,850 $900 $660 inanciar DuMETISM 3333 The Boeing Company 1996 1997 1995 Balance Sheet Cash and ST Investments Total Assets Total Debt $3.554 $2720 22,040 $5.469 $4.420 32.741 37.880 38,02436,672 7,4896.8546.972 Income Statement Sales Depreciation and 32.960 35.453 45,800 56.154 57,993 EBIT Not Income Market Value Number of Shares (millions) Stock Price year end) Bond Rating Market Share ("%by Units) Deliveries 67.5% Orders va 68.1% 71.1% 5384 launch aid had to be repaid within 17 years and had to earn a market rate of return. Historically, and like the risk sharing capital, launch aid repayment came through a per plane fee. For this reason, plus the fact that non-repayment did not trigger default, launch aid more closely resembled cumulative preferred stock than debt. The British Government had recently approved $835 (530) million in launch aid to support BAE Systems' share of project, in part because the plane would create 8,000 new jobs and safeguard 20,000 more across the British aerospace industry." Yet in reporting the story, The Economist noted, "The terms of the British government aid are suspiciously secret... (which) may indicate the rules have been stretched." Project Economics Assuming the development went as planned and the cost remained at $13 billion-skeptics cautioned the total cost might reach $15 billion or more-Airbus expected to deliver the first planes in 2006. When it reached full production capacity of just over four planes per month in 2008, the A3XX would have an average realized price of approximately $225 million and operating margins of ranging from 15% to 20%. These margins were based on earnings before repayment of launch aid and risk sharing capital. In other words, they were potential returns to all capital providers collectively. The project would likely have an effective tax rate equal to 38%, the standard French rate including "social contribution." The analysts, however, disagreed in many areas. Besides total demand, they disagreed on the magnitude and composition of up-front investment (how much of the development cost was R&D that had to be expensed and how much could be capitalized and depreciated). They also disagreed on the appropriate tax rate, AIC's tax status (could the firm use the initial operating losses or would it have to use them to off-set future income), and the project's operating margins. For example, Lehman Brothers and CS First Boston predicted the A3XX would generate operating margins ranging from 20% to 30% (again before repayment of launch aid and risk sharing capital). Both were well above the 15% to 20% operating margins Boeing was thought to earn on its 747's. In general, however, larger planes earned bigger margins leading some analysts to claim that the companies made virtually all of their profits on wide body jets. Among other factors, financial success depended on getting enough early sales to drive down costs through learning curve effects. The concept of the learning curve originated in the 1930s based on studies of aircraft assembly. The basic idea was that unit costs, such as direct labor, declined as a function of cumulative output. As a result, the faster Airbus could sell planes, the more profitable it would become. This was especially true in the early years when cumulative output doubled relatively quickly. Based on these assumptions, Airbus had a target pre-tax IRR of 15%, but thought the actual IRR might be as much as 20%." As reference points, yields on long-term U.S. government bonds were approximately 6.0%, inflation was 2.0%, and aircraft manufacturers like Boeing and Canada's Bombardier had asset betas of 0.84 for their commercial aviation divisions. In addition to the direct profits from the A3XX, there were other sources of potential value. Foremost among them was the fact that the A3XX would eliminate Boeing's monopolistic control of the VLA market and its ability to Cross-subsidize smaller jets in its product line. According to the Dresdner Kleinwort Benson, this benefit could add an additional 1.5% to the project's IRR. A final, though smaller source of income would be the support services related to the sale, maintenance, and repair of planes. This section is based on Aerospace/Defense analyst reports from Lehman Brothers (Airbus Industrie, December 6, 1999), CS First Boston (Global Commercial Aerospace Monthly, May 23, 2000), and Dresdner Kleinwort Benson Research (The Business Case for the Double Decker, May 8, 2000), plus casewriter estimates. Assuming the development went as planned and the cost remained at $13 billion-skeptics cautioned the total cost might reach $15 billion or more-Airbus expected to deliver the first planes in 2006. When it reached full production capacity of just over four planes per month in 2008, the A3XX would have an average realized price of approximately $225 million and operating margins of ranging from 15% to 20%. These margins were based on earnings before repayment of launch aid and risk sharing capital. In other words, they were potential returns to all capital providers collectively. The project would likely have an effective tax rate equal to 38%, the standard French rate including "social contribution." The analysts, however, disagreed in many areas. Besides total demand, they disagreed on the magnitude and composition of up-front investment (how much of the development cost was R&D that had to be expensed and how much could be capitalized and depreciated). They also disagreed on the appropriate tax rate, AIC's tax status (could the firm use the initial operating losses or would it have to use them to off-set future income), and the project's operating margins. For example, Lehman Brothers and CS First Boston predicted the A3XX would generate operating margins ranging from 20% to 30% (again before repayment of launch aid and risk sharing capital). Both were well above the 15% to 20% operating margins Boeing was thought to earn on its 747's. In general, however, larger planes earned bigger margins leading some analysts to claim that the companies made virtually all of their profits on wide body jets. Among other factors, financial success depended on getting enough early sales to drive down costs through learning curve effects. The concept of the learning curve originated in the 1930s based on studies of aircraft assembly. The basic idea was that unit costs, such as direct labor, declined as a function of cumulative output. As a result, the faster Airbus could sell planes, the more profitable it would become. This was especially true in the early years when cumulative output doubled relatively quickly. Based on these assumptions, Airbus had a target pre-tax IRR of 15%, but thought the actual IRR might be as much as 20%." As reference points, yields on long-term U.S. government bonds were approximately 6.0%, inflation was 2.0%, and aircraft manufacturers like Boeing and Canada's Bombardier had asset betas of 0.84 for their commercial aviation divisions. In addition to the direct profits from the A3XX, there were other sources of potential value. Foremost among them was the fact that the A3XX would eliminate Boeing's monopolistic control of the VLA market and its ability to cross-subsidize smaller jets in its product line. According to the Dresdner Kleinwort Benson, this benefit could add an additional 1.5% to the project's IRR. A final, though smaller source of income would be the support services related to the sale, maintenance, and repair of planes. Based on the diagram above and the information provided. Please Compute PV of investment cash flows using information on page 8 and Exhibit 10 (CAPM needed to compute discount rate; use 6% as a risk premium). Use 10% of cumulative CapEx for depreciation each year? ( Please show formulas ) Based on these assumptions, Airbus had a target pre-tax IRR of 15%, but thought the actual IRR might be as much as 20%." As reference points, yields on long-term U.S. government bonds were approximately 6.0%, inflation was 2.0%, and aircraft manufacturers like Boeing and Canada's Bombardier had asset betas of 0.84 for their commercial aviation divisions. In addition to the direct profits from the A3XX, there were other sources of potential value. Foremost among them was the fact that the A3XX would eliminate Boeing's monopolistic control of the VLA market and its ability to cross-subsidize smaller jets in its product line. According to the Dresdner Kleinwort Benson, this benefit could add an additional 1.5% to the project's IRR. A final, though smaller source of income would be the support services related to the sale, maintenance, and repair of planes. Exhibit 10 Airbus Development Expenditure by Year ($ millions) Investment 2002 2003 2004 2005 2006 2007 2008 Total $1,100 0 $2,200 R&D Expenditure Capital Expenditures Working Capital Total $2,200 350 $1,320 $2,200 350 $880 250 150 $660 0 $440 0 300 300 200 $11,000 $1,000 $1,000 $13,000 $1,100 $2,600 $2,850 $2,850 50 $930 $1,570 $660 $440 Based on the diagram above - and the information provided. Please Compute PV of investment cash flows using information on page 8 and Exhibit 10 (CAPM needed to compute discount rate; use 6% as a risk premium). Use 10% of cumulative CapEx for depreciation each year? (Please show formulas ) Exhibit 10 Airbus Development Expenditure by Year ($ millions) Investment 2003 2004 2005 2006 2007 2008 Total $1,100 $2,200 $1,320 $880 $660 350 R&D Expenditure Capital Expenditures Working Capital Total $2.200 250 150 $2,600 $2,200 350 300 $2,850 200 $1,570 $440 0 O $440 $11,000 $1,000 $1.000 $13,000 $1,100 $2,850 $900 $660 inanciar DuMETISM 3333 The Boeing Company 1996 1997 1995 Balance Sheet Cash and ST Investments Total Assets Total Debt $3.554 $2720 22,040 $5.469 $4.420 32.741 37.880 38,02436,672 7,4896.8546.972 Income Statement Sales Depreciation and 32.960 35.453 45,800 56.154 57,993 EBIT Not Income Market Value Number of Shares (millions) Stock Price year end) Bond Rating Market Share ("%by Units) Deliveries 67.5% Orders va 68.1% 71.1% 5384 launch aid had to be repaid within 17 years and had to earn a market rate of return. Historically, and like the risk sharing capital, launch aid repayment came through a per plane fee. For this reason, plus the fact that non-repayment did not trigger default, launch aid more closely resembled cumulative preferred stock than debt. The British Government had recently approved $835 (530) million in launch aid to support BAE Systems' share of project, in part because the plane would create 8,000 new jobs and safeguard 20,000 more across the British aerospace industry." Yet in reporting the story, The Economist noted, "The terms of the British government aid are suspiciously secret... (which) may indicate the rules have been stretched." Project Economics Assuming the development went as planned and the cost remained at $13 billion-skeptics cautioned the total cost might reach $15 billion or more-Airbus expected to deliver the first planes in 2006. When it reached full production capacity of just over four planes per month in 2008, the A3XX would have an average realized price of approximately $225 million and operating margins of ranging from 15% to 20%. These margins were based on earnings before repayment of launch aid and risk sharing capital. In other words, they were potential returns to all capital providers collectively. The project would likely have an effective tax rate equal to 38%, the standard French rate including "social contribution." The analysts, however, disagreed in many areas. Besides total demand, they disagreed on the magnitude and composition of up-front investment (how much of the development cost was R&D that had to be expensed and how much could be capitalized and depreciated). They also disagreed on the appropriate tax rate, AIC's tax status (could the firm use the initial operating losses or would it have to use them to off-set future income), and the project's operating margins. For example, Lehman Brothers and CS First Boston predicted the A3XX would generate operating margins ranging from 20% to 30% (again before repayment of launch aid and risk sharing capital). Both were well above the 15% to 20% operating margins Boeing was thought to earn on its 747's. In general, however, larger planes earned bigger margins leading some analysts to claim that the companies made virtually all of their profits on wide body jets. Among other factors, financial success depended on getting enough early sales to drive down costs through learning curve effects. The concept of the learning curve originated in the 1930s based on studies of aircraft assembly. The basic idea was that unit costs, such as direct labor, declined as a function of cumulative output. As a result, the faster Airbus could sell planes, the more profitable it would become. This was especially true in the early years when cumulative output doubled relatively quickly. Based on these assumptions, Airbus had a target pre-tax IRR of 15%, but thought the actual IRR might be as much as 20%." As reference points, yields on long-term U.S. government bonds were approximately 6.0%, inflation was 2.0%, and aircraft manufacturers like Boeing and Canada's Bombardier had asset betas of 0.84 for their commercial aviation divisions. In addition to the direct profits from the A3XX, there were other sources of potential value. Foremost among them was the fact that the A3XX would eliminate Boeing's monopolistic control of the VLA market and its ability to Cross-subsidize smaller jets in its product line. According to the Dresdner Kleinwort Benson, this benefit could add an additional 1.5% to the project's IRR. A final, though smaller source of income would be the support services related to the sale, maintenance, and repair of planes. This section is based on Aerospace/Defense analyst reports from Lehman Brothers (Airbus Industrie, December 6, 1999), CS First Boston (Global Commercial Aerospace Monthly, May 23, 2000), and Dresdner Kleinwort Benson Research (The Business Case for the Double Decker, May 8, 2000), plus casewriter estimates. Assuming the development went as planned and the cost remained at $13 billion-skeptics cautioned the total cost might reach $15 billion or more-Airbus expected to deliver the first planes in 2006. When it reached full production capacity of just over four planes per month in 2008, the A3XX would have an average realized price of approximately $225 million and operating margins of ranging from 15% to 20%. These margins were based on earnings before repayment of launch aid and risk sharing capital. In other words, they were potential returns to all capital providers collectively. The project would likely have an effective tax rate equal to 38%, the standard French rate including "social contribution." The analysts, however, disagreed in many areas. Besides total demand, they disagreed on the magnitude and composition of up-front investment (how much of the development cost was R&D that had to be expensed and how much could be capitalized and depreciated). They also disagreed on the appropriate tax rate, AIC's tax status (could the firm use the initial operating losses or would it have to use them to off-set future income), and the project's operating margins. For example, Lehman Brothers and CS First Boston predicted the A3XX would generate operating margins ranging from 20% to 30% (again before repayment of launch aid and risk sharing capital). Both were well above the 15% to 20% operating margins Boeing was thought to earn on its 747's. In general, however, larger planes earned bigger margins leading some analysts to claim that the companies made virtually all of their profits on wide body jets. Among other factors, financial success depended on getting enough early sales to drive down costs through learning curve effects. The concept of the learning curve originated in the 1930s based on studies of aircraft assembly. The basic idea was that unit costs, such as direct labor, declined as a function of cumulative output. As a result, the faster Airbus could sell planes, the more profitable it would become. This was especially true in the early years when cumulative output doubled relatively quickly. Based on these assumptions, Airbus had a target pre-tax IRR of 15%, but thought the actual IRR might be as much as 20%." As reference points, yields on long-term U.S. government bonds were approximately 6.0%, inflation was 2.0%, and aircraft manufacturers like Boeing and Canada's Bombardier had asset betas of 0.84 for their commercial aviation divisions. In addition to the direct profits from the A3XX, there were other sources of potential value. Foremost among them was the fact that the A3XX would eliminate Boeing's monopolistic control of the VLA market and its ability to cross-subsidize smaller jets in its product line. According to the Dresdner Kleinwort Benson, this benefit could add an additional 1.5% to the project's IRR. A final, though smaller source of income would be the support services related to the sale, maintenance, and repair of planes. Based on the diagram above and the information provided. Please Compute PV of investment cash flows using information on page 8 and Exhibit 10 (CAPM needed to compute discount rate; use 6% as a risk premium). Use 10% of cumulative CapEx for depreciation each year? ( Please show formulas ) Based on these assumptions, Airbus had a target pre-tax IRR of 15%, but thought the actual IRR might be as much as 20%." As reference points, yields on long-term U.S. government bonds were approximately 6.0%, inflation was 2.0%, and aircraft manufacturers like Boeing and Canada's Bombardier had asset betas of 0.84 for their commercial aviation divisions. In addition to the direct profits from the A3XX, there were other sources of potential value. Foremost among them was the fact that the A3XX would eliminate Boeing's monopolistic control of the VLA market and its ability to cross-subsidize smaller jets in its product line. According to the Dresdner Kleinwort Benson, this benefit could add an additional 1.5% to the project's IRR. A final, though smaller source of income would be the support services related to the sale, maintenance, and repair of planes. Exhibit 10 Airbus Development Expenditure by Year ($ millions) Investment 2002 2003 2004 2005 2006 2007 2008 Total $1,100 0 $2,200 R&D Expenditure Capital Expenditures Working Capital Total $2,200 350 $1,320 $2,200 350 $880 250 150 $660 0 $440 0 300 300 200 $11,000 $1,000 $1,000 $13,000 $1,100 $2,600 $2,850 $2,850 50 $930 $1,570 $660 $440