Tag Archives: time value of money

“A bird in the hand is worth two in the bush” (speech)

Thanks to the drive of some individuals (Sarah, EduardoDominique) a new Toastmasters corporate club (1) is being created within Airbus in Toulouse, where I work.

I joined Toastmasters in 2007 when I lived in Madrid and I have written often about Toastmasters in this blog, however I had become inactive in the last couple of years. This new initiative is very convenient and thanks to it I am engaging myself again in the association.

Today, I gave again a prepared speech in Toastmasters (2). In this post I just wanted to share it. Find it here, “A bird in the hand is worth two in the bush”, and below:

A bird in the hand is worth two in the bush

The topic of the speech is known for the reader of this blog: impact of delays in aircraft development projects seen as investment projects, the time value of money, discounting cash flows, break even, etc.

The feedback that I got: It was well received, especially the introduction, the interaction with the audience, the structure and how the topic was introduced and the main points called back in the end. However, I lost some individuals with the last slide, which needed some more explanation. I should have simplified the graphic. Some demanded more pauses and better vocalization.

(1) Up to now it is a prospect Toastmasters club.

(2) Project #1 of the “Speeches by Management” advanced manual: “The briefing”.

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Filed under Aerospace & Defence, Investing, Toastmasters

Time Value of Money

In courses about finance in the past, as part of job-related investment projections, for personal investments and as part of exercises related to posts in this blog I have discounted cash flows several times. Discounted? To those not initiated: it is about the time value of money.

Many course of finance start with the explanation of time value of money. You can find Wikipedia’s article here.

I recently came across the most descriptive and ancient (to my knowledge) explanation of the concept.

A bird in a hand is worth two in the bush”, Aesop, 600 B.C.

Seeking Wisdom: From Darwin to Munger, Peter Bevelin.

Seeking Wisdom: From Darwin to Munger, Peter Bevelin.

I found it while reading “Seeking Wisdom: From Darwin to Munger”, by Peter Bevelin, in which the author retrieved a passage from Warren Buffett’s 2000 Letter to the Shareholders of Berkshire Hathaway [PDF, 93KB, pg. 13]

Leaving aside tax factors, the formula we use for evaluating stocks and businesses is identical. Indeed, the formula for valuing all assets that are purchased for financial gain has been unchanged since it was first laid out by a very smart man in about 600 B.C. (though he wasn’t smart enough to know it was 600 B.C.).

The oracle was Aesop and his enduring, though somewhat incomplete, investment insight was “a bird in the hand is worth two in the bush.” To flesh out this principle, you must answer only three questions. How certain are you that there are indeed birds in the bush? When will they emerge and how many will there be? What is the risk-free interest rate (which we consider to be the yield on long-term U.S. bonds)? If you can answer these three questions, you will know the maximum value of the bush ¾ and the maximum number of the birds you now possess that should be offered for it. And, of course, don’t literally think birds. Think dollars.

Aesop’s investment axiom, thus expanded and converted into dollars, is immutable. It applies to outlays for farms, oil royalties, bonds, stocks, lottery tickets, and manufacturing plants. And neither the advent of the steam engine, the harnessing of electricity nor the creation of the automobile changed the formula one iota — nor will the Internet. Just insert the correct numbers, and you can rank the attractiveness of all possible uses of capital throughout the universe.

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787 Break Even for Dummies

My previous two posts on Boeing 787 break even (original and further discussion) were generally well received, as far as the insight they provided on the matter and the way they treated the different variables at play.

From the feedback, I understand they were quite dense regarding the amount of information they conveyed and not so easy to grasp for the general public.

In this post I will try to apply the old adage “A picture is worth a thousand words” and show everything which was mentioned in the previous posts in just four graphics.

Forget the 787. Any new commercial aircraft program shows a similar cash flow profile, with initial cash outlays to cover the long the development period, a ramp-up of production and a learning curve effect once the series production advances.

Cash flow profile of a typical commercial aircraft program.

Take the case of the 787. The discussions made in the previous posts and the influence of the different variables are summarized in the different boxes of the next graphic.

787 cash flow profile?

What is critical in a commercial aerospace program as an investment project? The long development period makes it difficult for the positive cash flows at the second half of the life cycle of the aircraft to compensate the initial cash outlays spent in R&D, capital investment and production of the first units. Why is that difficult? Due to the time value of money: A positive dollar of the tenth year will only compensate 39 cents of the first year (at a discount rate of 10%)…

787 cash flow profile affected by the time value of money.

Let’s get back to the “accounting block”, what was going to happen around 2015, and whether the 787 would make profits for Boeing. In the yearly accounting, revenues are not discounted, thus the above discussion doesn’t apply. As soon as production costs plus amortization of initial investments are balanced by revenues, the 787 will make a profit for Boeing.

787 accounting block, profits...

After having shared all these plays with numbers and hopefully having shed some light over the issue, it is important to remind that these are just models and that what will finally happen will only depend on Boeing’s engineers, shop floor workers and sales teams.

“Not everything that counts can be counted, and not everything that can be counted counts.”

(Sign hanging in Einstein’s office at Princeton)

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