February 3rd, 2015
The Boeing 7E7
I. Statement Of The Problem
Michael Bair, Boeing Senior Vice President announced a new “super-efficient” jet, the Boeing 7E7, also known as the “Dreamliner.” The only problem with this announcement was that it was announced in 2003, a time period where airline profits were the worse seen in a generation. In order for this plane to get the approval of the board, Bair would need to complete a valuation of the 7E7 project and prove that the project would be profitable for Boeing’s shareholders.
II. Alternative Solutions
1. Determine Boeing’s Net Present Value (NPV)
2. Use Weighted Average Cost of Capital (WACC)
III. Analysis of Alternatives
NPV (Net Present Value)
In finance, the net present value (NPV) or net present worth is defined as the sum of the present values of incoming and outgoing cash flows over a period of time. The net present value is used in order to determine rather a project will be profitable or not. To determine rather the Boeing 7e7 will be profitable or not, my analysis includes finding out the payback period, or how long it will take for Boeing to make a profit out of this plane. The net present value analysis determined that in order for the project to be profitable, it would take 26 years, making the payback period 25 years. The analysis also determined that Boeing would generate a rough total of about 7 billion dollars in profitability by the end of the 37-year forecast. If you only look at the short run, investing in the Boeing 7e7 is not profitable. Looking at the bigger picture, in the long run the company would generate a lot of revenue.
WACC (Weighted Average Cost of Capital)
The WACC for Boeing’s 7E7 project is 7.22%. This tells us that level of risk associated with the project. The IRR for this project is 15.7%. Since the WACC is less than the IRR, it would be a great idea for Boeing to continue the project. The project would be profitable