The Boeing 7e7

Topics: Weighted average cost of capital, Boeing Commercial Airplanes, Boeing, Airbus A350, Internal rate of return, Costs / Pages: 14 (3393 words) / Published: Apr 5th, 2011
Objectives

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?

Introduction

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

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