FIN 327: Class Objectives and Case Questions Airbus 3XX OBJECTIVES of CAPITAL BUDGETING 1: • Review basic principles concerning evaluation of investment projects and prepare to apply these principles and concepts to a real investment project • Review of investment analysis and criteria for best investment decisions • Review the difference between accounting and economic break-even • Risk and capital investment decisions and implications for the selection of a discount rate appropriate for project present value calculations • Capture the possible link between price and quantity when forecasting cash flows • Role of capital rationing in corporate investment decisions and relation to value creation of the firm • How to take inflation into account in project analysis. Questions for Analysis of Case Airbus A3XX: Developing the World’s Largest Commercial Jet Please consider the following questions in your analysis of the Airbus case: (1) Why is Airbus interested in building the A3XX? What are its objectives? How does its estimates of the aircraft’s sales potential differ from Boeings? How do these analyses differ in their assumptions? (2) What discount rate has been used in Airbus calculations of break-even sales? (3) What alternative discount rates (costs of capital) can you identify in the case? Choose one of them and make sure you know whether it is a real or a nominal cost of capital? (4) Would you want to use a nominal or a real cost of capital to discount the future cash flows provided by the case? (5) How many aircraft does Airbus need to sell in order to add value for its shareholders? Is this number greater or less than your estimate of the total demand for very large aircraft (VLA) over the appropriate investment horizon? Hint: Consider all capital providers as a single entity and calculate the break-even return to them collectively. To calculate the break-even number of planes, calculate the present value of the required investment and compare it to the present value of a growing perpetuity of cash flows from sales beginning in 2008. Your choice of cost of capital will of course matter here (6) Should Airbus commit to build the A3XX? How many orders should Airbus have before committing to develop the plane?