In early 2003, Boeing released plans to build a new “super efficient” jet called the 7E7. The jet subsequently gained the nickname the “Dreamliner.” In the six months following the announcement news depressed the market for aircraft, which was already shrinking. This news included the United States going to war with Iraq, global terrorist attacks, and SARS putting travelers in fear. This all contributed to the worst airline profits in a generation. From Boeing’s perspective this meant for a promising market to introduce a major new product. Boeing moved forward with this concept and planned to release the 7E7 in 2008. It is Michael Bair’s job to make a recommendation to the board of directors for a final decision on the project. In order to do this he will need to complete a valuation of the 7E7 project in order to convince Boeing’s CEO and other upper management that the project would be financially profitable for Boeing’s shareholders.
In order to complete this financial analysis, Bair will need to calculate Boeing’s WACC along with IRR to determine whether this is a financially worthwhile project. In order to calculate the WACC, Bair must consider the betas from Boeing’s commercial sector as well as the defense sector. One beta cannot be used for the whole company due to the vast difference in volatility between the two sectors. Once these two separate betas are calculated, they can be weighted based on the % revenue which each industry contributes to the company and then a WACC can be calculated for Boeing as a whole. This number is then compared with the IRR of the 7E7 project to determine whether the project should continue. Based on the results of this analysis, I determined that Boeing should take on the 7E7 project. All calculations are provided below. Appendix #1
Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?
Boeing is contemplating launching the 7E7 for a few reasons. The first reason is...
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