Summary and Objectives (This case contains a spreadsheet)
The objective of the case is to evaluate the development of 7E7, a new commercial aircraft. Boeing operates in two different business segments, a commercial-aircraft business segment and a defense system segment. Now the commercial-aircraft segment is facing stiff competition from Airbus and losing its advantage. Boeing executives wish to come up with a more flexible and fuel efficient jetliner to regain market share.
Michael Bair, the leader of the 7E7 project, had conducted in-depth research of the project. Based on the information released by Boeing, Exhibit 8 shows a detailed free cash flow forecast for the 7E7 project from 2004 to 2037. Based on the baseline forecast, the Internal Rate of Return (IRR) from this project is around 15.66%. Given the projected cash flow information from Boeing, please conduct the following analysis.
1) Please work through Exhibit 8 (spreadsheet) carefully to see how Mr. Bair forecasted the cash flows (you don’t need to answer this question, just check the spreadsheet carefully). 2) To evaluate the 7E7 project, given the available information, what capital budgeting decision rule that you choose to use?
3) What would be the proper discount rate to use for the expected free cash flows from the 7E7 project, considering the business nature of Boeing? More specifically:
a. What is the beta for the project, and how to estimate it?
b. Calculate the proper discount rate, show the model, inputs and/or assumptions that you make.
4) Given the uncertainty of the future, could you conduct sensitivity analysis and show how and if it will affect your investment decision? Show details of your sensitivity analysis. 5) Given your analysis, what is your recommendation for the 7E7 project?
Please fully utilize the information given in the case to support your argument. Please explain and justify major assumptions used in your estimation.