Boeing 7E7 Case Analysis
TULANE UNIVERSITY
Case Analysis: The Boeing 7E7
Valuation Section 02
Group 2
DIFEI SUN
HONG CHEN
JIAKAI DU
XIAOTONG ZHANG
YIHAN SUN
9/7/2014
1.
Introductory to Case: The Boeing 7E7
In 2003, Boeing made a gamble announcing plans to build a new commercial jet called
7E7. The advantages in technology and precedency in travelling speed would prefigure the success of the business plan. However, with all threats from real world including terrorism and infectious disease, Boeing would need to weigh all considerations before making final decision to proceed the plan.
In this case, we cautiously made assumptions when estimating cost of debt, commercial-defense beta ratio, risk free rate and risk premium. And finally estimated the project’s weighted-average cost of capita l(WACC) against the given internal rates of return(IRR). 2.
Capital Budgeting Decision Rule
According to detailed free cash flow forecast for the 7E7 project from 2004 to 2037,
Baseline estimated the Internal Required Return (IRR) of this project to be 15.66%, assuming that the Net Present Value (NPV) of projected free cash flows equals to the annual free cash flow in 2004. The IRR decision rule states that if the IRR of a project exceeds the required rate of return of a project, then we should accept and implement the project. Otherwise, we should not undertake the investment. Therefore, the key to evaluate the effectiveness of the 15.66% IRR is to have it compared with required rate of return or cost of capital for the project.
3.
WACC Estimation
Given the information in the case, we should calculate the cost of capital or WACC for this project. In this case, we select the general WACC method. The formula is as follows:
!
!
???? = ?! ! + ?! ! 1 − ?!
(1)
where ?! denotes the cost of equity, ?! denotes the cost of debt, and ?! denotes the
Case Analysis: The Boeing 7E7
Valuation Section 02
Group 2
DIFEI SUN
HONG CHEN
JIAKAI DU
XIAOTONG ZHANG
YIHAN SUN
9/7/2014
1.
Introductory to Case: The Boeing 7E7
In 2003, Boeing made a gamble announcing plans to build a new commercial jet called
7E7. The advantages in technology and precedency in travelling speed would prefigure the success of the business plan. However, with all threats from real world including terrorism and infectious disease, Boeing would need to weigh all considerations before making final decision to proceed the plan.
In this case, we cautiously made assumptions when estimating cost of debt, commercial-defense beta ratio, risk free rate and risk premium. And finally estimated the project’s weighted-average cost of capita l(WACC) against the given internal rates of return(IRR). 2.
Capital Budgeting Decision Rule
According to detailed free cash flow forecast for the 7E7 project from 2004 to 2037,
Baseline estimated the Internal Required Return (IRR) of this project to be 15.66%, assuming that the Net Present Value (NPV) of projected free cash flows equals to the annual free cash flow in 2004. The IRR decision rule states that if the IRR of a project exceeds the required rate of return of a project, then we should accept and implement the project. Otherwise, we should not undertake the investment. Therefore, the key to evaluate the effectiveness of the 15.66% IRR is to have it compared with required rate of return or cost of capital for the project.
3.
WACC Estimation
Given the information in the case, we should calculate the cost of capital or WACC for this project. In this case, we select the general WACC method. The formula is as follows:
!
!
???? = ?! ! + ?! ! 1 − ?!
(1)
where ?! denotes the cost of equity, ?! denotes the cost of debt, and ?! denotes the