- Why is Airbus interested in building the A3XX? What are its objectives?
- How many aircraft does Airbus need to sell in order to break even on the investment? 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 plane sales beginning in 2008. Please use a discount rate of 11% in your analysis. With this approach, since you are estimating cash flows from a perpetuity, your answer will be in a number of planes per year (forever), such that NPV is zero. The growth in the perpetuity comes from rising prices (i.e., not more planes). Assume that the same number of places are sold each year.
- As Boeing, how would you respond to this situation? How does your answer depend on what you think Airbus is likely to do? Please provide some simple (back of the envelop) calculations to support your answers.
- Should Airbus commit to build the A3XX? How many orders should Airbus have before committing to develop the plane? Again, provide some numerical support for your answers.
Sample Solution