Question 1
Unsophisticated capital budgeting techniques do NOT
◦ examine the size of the initial outlay.
◦ use net profits as a measure of return.
◦ explicitly consider the time value of money.
◦ take into account an unconventional cash flow pattern.
Question 2
What is the payback period for the Airbus A380 project? The Airbus A380 is the largest civilian aircraft ever built. It can carry 555 passengers on two decks. Initial project investments were $13B. Assume that the initial investment was paid on Dec 31, 2008. Assume that Airbus will produce 60 aircraft per year for five years. Each aircraft will be sold for $230M and total operating costs are 75% of revenues. Assume that revenues and costs occur at year-end with the first revenues (and costs) occurring on Dec 31, 2009. Ignore taxes and assume that there are no terminal year cash flows. Select the earliest year such that the initial investments are completely paid off.
◦ 3 years
◦ 4 years
◦ 5 years
◦ The project is not paid off in this time frame.
◦ Need the cost of capital to answer this question.
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