In the Airbus case we are faced with a capital budgeting decision. It is the planning process used to determine whether a firm’s long term investments such as new machinery, replacement machinery, new plants, new products, and research development projects are worth pursuing. It is budget for major capital, or investment, expenditures. Capital budgeting decisions are crucial to a firm’s success for several reasons. First, capital expenditures typically require large outlays of funds. Second, firms must ascertain the best way to raise and repay these funds. Third, most capital budgeting decisions require a long-term commitment. Finally, the timing of capital budgeting decisions is important. When large amounts of funds are raised, firms must pay close attention to the financial markets because the cost of capital is directly related to the current interest rate. In the case of Airbus the company is facing the decision of developing the world’s largest commercial jet in order to compete on the very large aircraft market with Boeing 747. In order to calculate whether the investment is worth taking, a discounted cash flow analysis is used. How many aircraft does Airbus need to sell in order to break even on its investment? After making some assumption and calculation of the Net Present Value, Airbus would need to sell about 45 aircrafts in order to break even. (Please see excel file). If the Net present value is negative, then the investment is not worth taking and the project is not able to cover its investment. When the NPV is equal to zero, it is the point at which the project will beak-even. If the NPV is positive, the project is worth taking and it is able to cover all the investment costs and make a profit. What is Airbus’ maximum exposure in taking on the A3XX project? Undertaking this project has very high risk, since the investment made by the company is very high. The maximum exposure that the company is taking on the project is to loose all the investments made up to now, which is approximately $13 billion. This may lead to jeopardizing the future of the company and even bankruptcy. Other problems that they might face are during the manufacturing process, they may have difficulty keeping up with the deadlines and thus this may lead to penalty fees for late deliveries of aircrafts. This may cause a reduction in orders and customers turning to the competitors.
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