Airbus Delays Flight

Airbus has been a proponent of hydrogen-powered commercial aircraft, stating that it wanted to have the first plane in the air by 2035. Now, it appears that Airbus was too ambitious in its goal as it has delayed plans for the new jet. Airbus did not give a new target date, but noted that the technology was 5-10 years behind the pace needed to bring the plane to the skies by 2035.

Project Titan(ic)

In 2014, Apple was rumored to have approved Project Titan, Apple's development of an electric car. In 2015, Apple formally introduced the new project. At its height in 2018, Project Titan employed 5,000 people. Now, nearly a decade later after it started, Apple announced that it is shutting down Project Titan, thereby exercising the option to abandon. With shrinking demand for electric cars, Apple must have believed that spending more money on the new car isn't worth the payoff, even though Apple had reportedly already spent more than $10 billion on the project. We will likely see a write off announcement in the next several months detailing the total spent on the project. Apple has utilized another option as it also announced that many of the Project Titan employees would begin working on AI technology. Fortunately for Apple, it doesn't appear the money spent on this project will sink the company.

A Green NPV

European low cost carrier Ryanair announced a new project that will install Split Scimitar winglets on each of the company's Boeing 737-800s. The installation is expected to reduce fuel consumption by 1.5 percent and reduce CO2 emissions by 165,000 tons per year. So, the project is green for the environment, but is it green for stock holders? A quick calculation shows that it is. Based on the numbers, Ryanair spent €1.14 billion on fuel in a recent quarter, which amounts to €4.56 billion per year. A 1.5 percent savings in fuel costs is €68.4 million per year. This savings results in a payback period of 2.92 years. Assuming a 10 percent discount rate and 20 years of operation, the NPV is about €382 million. Sounds like a green, green project to us.  

NPV Analysis

It is always interesting to see a real-world application of concepts you have learned in class. Recently, Voyageur Pharmaceuticals Ltd. released the results of its capital budgeting analysis of a barium sulfate project in British Columbia, Canada. Notice the company repeatedly refers to the project NPV, but also calculates the IRR and payback period. The report includes the key variable assumptions and the NPV per share. What we also find interesting is the sensitivity figure near the bottom of the article. The company shows the sensitivity of the project to changes in operating costs, revenue, and capital. It appears that the NPV of this project is most sensitive to changes in revenue.

Zillow Abandons Flips

On September 13, Zillow Chief Operating Officer Jeremy Wacksman stated that ''We, over time, believe this can be a service that is offered to the majority, to over 50 percent of the housing stock." Wacksman was referring to Zillow's foray into house flipping. Given Zillow's unique data, it should have inside data for the housing market. Instead, Zillow has decided to abandon house flipping, laying off 25 percent of the workforce. Zillow wrote off $304 million in losses due to house flipping in the third quarter, with another $240 million to $265 million in losses to follow.

Adidas Kicks Out Reebok

In 2006, Adidas purchased Reebok for about $3.8 billion. The goal was to increase the company's presence in the sneaker market to better compete with Nike. In the past several years, Adidas' sales have grown, while Reebok's sales have been poor. As a result, Adidas has agreed to sell Reebok to Authentic Brands Group for about $2.5 billion, abandoning its investment in Reebok.

Ford Abandons Brazil

A century ago, Henry Ford lost a considerable amount attempting to become a rubber baron in Brazil. Now, Ford is retreating from Brazil again. Over the past decade, the company lost about $7.8 billion on its Brazilian manufacturing, or about $2,000 per car, so the company exercised its option to abandon. Ford recently announced that it would close its plants in Brazil, paying an additional $4.1 billion to get out of commitments in the country, for a total loss of about $12 billion. Other car companies are also losing money in Brazil, with Volkswagen Brazil losing about $4.1 billion since 2011. Sometimes it is better to abandon a plan rather than continue to lose money.

Centerra's Kumtor Sensitivity

Centerra Gold, a Canadian mining company, recently released its NPV analysis of the Kumtor Mine, which is located in Kyrgyzstan. Centerra's release includes the projected cash flows for the next 11 years, the expected life of the mine. Centerra also conducted several sensitivity analyses, including a change in the discount rate, a change in the price of gold, changes in operating and capital costs, and changes in the exchange rate. We should note that Canterra proposes that the discount rate should only be 5 percent. This number seems low to us, especially when analyzing a project in a foreign country.

GM's Electric Option

A recent Wall Street Journal article discusses GM's managerial option to abandon gas-powered automobile manufacturing and convert to an all-EV product line. In order to achieve this end, GM plans to spend $27 billion by the middle of the decade to convert its plants to manufacture 30 EV models, as well as develop driverless vehicles. Currently, EV vehicles generate only 2 percent of GM's sales and no profits. Because the manufacturing process is so different, GM plans to gut plants, basically revamping everything inside the outer walls. GM's plan is to manufacture only EV vehicles by 2035, a massive change in the company's manufacturing capabilities.

Monte Carlo In Retirement

In the textbook, we discussed the use of a Monte Carlo simulation in capital budgeting. A common application of a Monte Carlo simulation is using it to determine the probability a retirement portfolio will last for the duration of an individual's life. However, as the article notes, it may be difficult for the average investor to understand "the odds of success" or recognize the difference between a 50 percent probability of success and a 70 percent probability of success. One point the article makes that we would like to reiterate is that flawed inputs can cause erroneous outputs. In other words, like any other model, the end result is only as accurate as the inputs. 

Thiel In Control

Palantir Industries, the data-mining company owned by billionaire Peter Thiel, went public this week. But take note, if you buy stock in the company you will have virtually no say in the company's operations. Thanks to super-voting shares, Thiel and two other co-founders will retain voting control in perpetuity. Other Silicon Valley companies like Alphabet, Facebook, and Snap have similar voting structures. As Ohio State professor Michael Weisbach notes, "They  set it up so Peter Thiel can still sort of run it like a private company and still have the advantage of being public." The three co-founders will retain 49.99 percent of the voting power in the company regardless of the number of shares owned.    

Harley-Davidson Abondons India

Harley-Davidson announced that it was discontinuing manufacturing and sales in India, effectively abandoning the world's largest motorcycle market. Harley-Davidson joins the list of foreign manufacturers that have not been able to enter the Indian market, including General Motors, which stopped sales in India in 2017, and Ford, which entered a joint venture to scale back its Indian operations. These companies all exercised the option to abandon.

Kia's Home Run

When Kia debuted the Telluride, the company set production capacity at 60,000 units. Demand was so high that the company upped production to 100,000 units, but one couple has already waited 9 months for their SUV and they were told to expect another 5-6 month wait. A production shutdown due to COVID-19 has slowed delivery and once production restarted, a parts shortage still limited manufacturing. Obviously, sales of the Telluride is a best-case scenario for Kia, although production difficulties means the best-case has been limited to date. One other thing we want you to note is terminology. The article states that the turn rate was 11 days for most of the year, but it is currently at 0 days. The turn rate is the same as the days' sales in inventory ratio we discussed in the textbook.

A Fantastic NPV

One thing you should always consider is the reasonableness of any estimate. For example, Hycroft Mining recently announced that a gold mine the company on which the company has begun work has an NPV of $2.1 billion with an initial investment of $61 million! The project has an IRR of 147 percent and a profitability index of more than 34 times. While this certainly seems to be a fantastic project, we have some doubts about the extremely high NPV and IRR estimates. We would also mention that the discount rate of 5 percent, which was used by the company, seems low for a project of this risk. The stock market doesn’t believe the NPV of this mine is anywhere near $2.1 billion: The company’s current market capitalization is about $5 million.

Airbus Abandons The A380

In an option to abandon, Airbus announced that it would discontinue delivery of the A380 in 2021. The giant plane first flew 14 years ago. Airbus spent about $25 billion in developing the 853 passenger plane, but has only delivered 234 planes to date, well short of the 1,200 the company had projected. The demise of the plane is in large part due to the decision by airlines to fly lighter, more fuel efficient planes that reduced the need to fly a large number of passengers to hub airports. Boeing still manufactures its own jumbo jet, the 747, but delivered only six 747s in 2018. Of course, Boeing may get a pick up in orders for the 747 without competition from Airbus in the jumbo jet market.

Volkswagen's Option To Abandon

Volkswagen recently announced that it would discontinue production of the iconic Beetle, which was first manufactured in the 1930s. The Beetle was produced until 1978, when Volkswagen first dropped the car from production in Germany. The car was reintroduced in 1997. With sales of only 60,000 cars per year, evidently the NPV of continuing to produce Beetles was negative. Remember, the option to abandon exists with any project, although as the previous reintroduction of the Beetle shows, the abandonment need not always be permanent.

Toyota's Manufacturing Option

Toyota recently spent $1.3 billion to overhaul its plant in Georgetown, Kentucky. The plant was originally designed to build the Camry and Avalon, which are both assembled on the same platform. However, a shift in consumer purchasing patterns has increased the sales of SUVs. The Georgetown plant could not manufacture these more profitable vehicles, an opportunity cost to the company. The plant remodel means that Toyota can produce 11 different models at the plant, allowing the company to switch production more quickly and cheaply in the future to meet consumer demand more efficiently. Toyota also plans to mix and match more components between its models, another increase in manufacturing optionality.

Finance And Sustainability

Although many think that sustainability and finance don't mix, sustainability is a major component of any corporation. For example, the availability and cost of a major component used in a project can dramatically affect the length and costs of that project. Pressed by investors, CFOs are now starting to discuss sustainability openly. One of the difficulties of such discussions is that a primary role for the CFO is to quantify the financial aspects of sustainability. For example, what are the costs of a natural resource used in production in 10 years? Such inputs are an obvious target for scenario and sensitivity analysis. 

Monster Write-off

Usually with a new project, a company will wait until after the project has begun to determine if the project will be successful or not. With the Paramount pictures movie Monster Trucks, the company decided that it had it had a monster flop on its hands. The movie, which has been in development since 2013, reportedly cost $125 million. Even though the movie won't be released until January 2017, Paramount announced that it would write off $115 million related to the movie. Write-offs due to poor box office receipts usually occur after a movie is released, but the move is not unprecedented. For example, in January 2015, DreamWorks wrote off $155 million due to unreleased films, which is the option to abandon. Whether Monster Trucks is ultimately released will help determine if the remaining development costs are written off.

Macy's Options

When a company makes an announcement, most people do not consider that many of these announcements are in fact real options. For example, yesterday Macy's made two separate announcements that are both real options. First, the company announced that it would close 35-40 underperforming stores, the option to abandon. Next, the company announced that it would open Best Buy outlets in 10 of its stores. While this is a small capital budgeting decision, it is an option to expand as Macy's and Best Buy both hope the combination is successful, in which case more Macy's will feature a Best Buy outlet.