The primary part of this analysis is to calculate the proper WACC for the Boeing Project.

Given that

the 7E7 is a commercial plane, we should calculate the WACC for the commercial segment of

Boeing, given by the following formula:

WACC =r e ( VE )+[ r (1−T )( DV )]

d
.

I’ll start by calculating E/V and D/V ratios. From the information in Exhibit 2 and D/E ratio, I

calculated that they are 65.57% and 34.27%, respectively. By unlevering the defense betas of

Lockheed and Northrop, we will be able to have an approximate value for defense unlevered beta

for Boeing. I decided to choose those companies as proxies because over 90% of the revenues are

from the defense segment. The S&P 500 21-month index is applied in the estimation because S&P

500 is Boeing’s index membership. The unlevered betas for Lockheed and Northrop are 0.30 and

0.22, respectively, based on the D/E ratio. The unlevered beta for the defense segment of Boeing is

estimated to be 0.26, which is the average of the unlevered betas for the proxies. From the case,

we have the Beta for Boeing including commercial and defense division. Using the appropriate

weights applied to the specific business and the levered Beta for Boeing, the Bcommercial is 0.3481.

To calculate the cost of equity, I am assuming a risk-free rate as the yield on the 30-year Treasury

bond, which was 4.56%, and a market risk premium of 6.4%, getting to a r e of 14.87%. For rd, I used

the yield to maturity of 2033 bonds to be consistent with the risk-free rate; r d is equal to 5.85%.

Based on these inputs, the WACC for Boeing commercial division is 11.06%.

Using the determined WACC and information presented in Exhibit 3, it is revealed that the internal

rate of return (IRR) tends to equal WACC in most pessimistic scenarios. From exhibit 9, Boeing

should consider the project if it can ensure sales of at least 1,750 planes during the first 20 years

and 80 more yearly until 2033, under minimum price circumstances and a development cost under
1
Further calculations in appendix
$8M when COGS are 80% of sales. If any of the circumstances vary in a negative way, i.e. sales

decreases, development cost increase and/or COGS% of sales increases, the project is

economically unattractive. Given that the development cost is a value we could have after deciding

to do the project, it will be a great insight we could share with the board and do more sensitive

scenarios but holding actual value of it.

Considering that the WACC is lower than IRR of the case and NPV of $2.85M , the 7E7 project is

expected to generate a return that is higher than the company's cost of capital. This is generally

considered to be a good thing, as it means that the project is expected to be profitable. However, it

is important to note that WACC is an estimate and is based on the assumptions I thought were the

most ideal for the case, but overall, the board should go ahead with the project considering that

the airplane will be open to new routes and serve more customers and possibly, outperform

Airbus, as well as generate value to its stakeholders.