The objectives of The Boeing 7E7 case study is to seek the answer for the project question.
Why is Boeing contemplating the launch of the 7E7 project? Is this the good time to do so?
How would we know if the 7E7 project will create value?
How to estimate the WACC?
Is there anything else the board of directors should consider in assessing the financial appeal of this project? Why might the board vote 'yes' on the 7E7, when the cost of capital estimate is greater than the IRR? Why might the board vote 'no' if the cost of capital is less than the IRR?
What should the board do?
Ultimately Boeing needs to determine if the project will be profitable and if it will have positive cash flows in accordance with business requirements. Our analysis shows that the WACC, NPV and IRR are favorable (according to sensitivity analysis) and the project will likely be profitable. Boeing should keep this project as an individual project within the commercial business division. Defense projects and commercial projects both have unique factors that can be handled efficiently through separate divisions with the ability to share research and knowledge between the two divisions. Boeing should pursue the project with disciplined focus on maintaining cost efficiencies.
The analysis identifies both risks and benefits associated with undertaking the 7E7 project. Giving a calculated WAAC of 15.44% for the commercial division of Boeing, the project is feasible and profitable. As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Assuming the development costs are correctly estimated and the market response is properly gauged, the reasons to go forward with the project outweigh those against it.
The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing. The new 7E7 will have lower operating costs due to increased cargo space and increased fuel economy due to new engine design, would also be versatile and suitable for both short and long flight routes. Ensuring the development and manufacturing costs are kept down by employing decades of engineering expertise and already proven technologies and solutions, it is recommended that Boeing undertakes the 7E7 project.
The launch of the 7E7 project
In early 2003, Boeing announced its plans to develop a new airplane (7E7 & 7E7 Stretch) in a market that was facing a tight squeeze on profits. The decline in the airline industry was attributed in large part to the war in Iraq, international terrorism, and fear of spreading SARS. The development of this new aircraft could possibly bring Boeing out of their innovation slump and potentially give them an advantage in the mid-sized aircraft market.
Since 1994, Boeing had not put a new airplane into production and had failed to follow through on two commercial aircraft programs. The company was in desperate need of an aircraft that would set them apart from Airbus, their main competitor and market leader. Boeing's vision for the 7E7 was a cost efficient plane that used less fuel, had cheaper operating costs, and flexibility for short or long haul routes. The new plane would be made with cheaper composite parts which would reduce the production time from 20 days to 3 days.
The new project faced some concerns. The cost efficiency relied on the use of composite materials that had not gained regulators' confidence. Also, Boeing would have to design completely new production methods for this new plane. Unfortunately, Boeing has a track record of problems with their production methods and delivering planes on time.
The board of directors also expected development cost estimates to be substantially reduced prior to approving such a product. The demand in the market...