Boeing Case:

1. Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do
so?

Since there is a launch for the project it should be more worry on this project launching
because the creating expense of the project could be as high as $10 billion. The enormous
starting cash outflows might require e a very long time to recover. Additionally, the
valuing of item is subjected to competitive weight, so it can't foresee the payback time of
the task. the board of executives needed to keep the improvement cost of 7E7 down to
just 40% of what it took to develop 7E7. The major competitor of Boeing, Airbus,
declared that 7E7 was a salesperson’s dream and engineer’s nightmare. Why do they say
so? This is because 7E7 was claimed to be the first commercial aircraft that primarily
build with carbon-reinforced material which are stronger and lighter than traditional
aluminum.

Another risk that should be considered is the competitive risk. Launch of new plane,
obviously, will roll out a high accomplishment in the first place however there is
additionally chance for different contenders and competitors to copy the product. Airbus,
the principle contender and competitor of Boeing, has expressed that if the fuel
effectiveness was primarily generated by new new engine disgns, at that point it would
simply arrange the more efficient engines for its plane.

2. Should Boeing’s Board approve the 7E7?

in long term, the profit for aircraft industry is feasible. This is because over the long
term,the industry cycle will smooth out, international trade, lower fares and improvement
of technology andnetwork services willenhance the demand of aircraft. Boeing’s Market
Outlook predicted that duringthe next 20 years, economies will grow annually by 3.2%,
and air travel will continue its historicrelationship with GDP by growing at an average
annual rate of 1.5%. Therefore, the long term outlook of aircraft demand seemed
positive.At last, is it the right time to launch the 7E7 project? The answer definitely is
“No”. However, in orderto maintain its position in the aircraft industry, Boeing has to
take the risk

3. How would we know if the 7E7 project will create value

Net Present Value is the difference between the present value of cash inflows and the
present value of cash outflows. It is used in capital budgeting to analyze the profitability
of an investment or project.NPV analysis is sensitive to the reliability of future cash
inflows that an investment or project will yield.NPV compares the value of a dollar today
to the value of that same dollar in the future, taking inflation and returns into account. If

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 the NPV of a prospective project is positive, the project is in the status of discounted cash
inflow in the time of t and it should be accepted

4. Examine the details of how to estimate the WACC ;

WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re)

Where,

Wdebt = proportion of debt in a market- value capital structure

rd = pretax cost of debt capital

tc = marginal effective corporate tax rate

Wequity = proportion of equity in a market-value capital structure

re = cost of equity capital

From Exhibit 10, Debt/equity ratio=0.525tc = 0.35

From the case page 237,

Rf = 0.85%

From Exhibit 2, Wdebt =44646/129686=0.344

Wequity = 85040/129686=0.656

From Exhibit 11, rd is calculated as below which is 5.335%

5. Is there anything else the board of directors should consider in assessing the financial
appeal of this project?

In assessing the financial appeal of The Boeing 7E7 project, there are three criteria that need to
fulfill before determine the acceptance or rejection of this project, which are included all cash
flows that occur during the life of the project, consider the time value of money and incorporate
the required rate of return on the project.To determine whether to accept or reject The Boeing
7E7 project, the board of directors can use several methods such as Payback Period, Discounted
Payback Period, Profitability Index, Internal Rate of Return and Modified Internal Rate of
Return to evaluate the project

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 Payback Period:

Advantages

• Easy to calculate and understand

• Adjusts for uncertainty of later cash flows
• Biased toward projects with higher liquidity

Disadvantages

• Ignores the time value of money

• Ignores cash flows beyond acceptable payback date
• Requires an arbitrary cutoff point

Discounted Payback Period:

Advantages

• Easy to calculate and understand

• Considers time value of money
• Biased toward projects with higher liquidity

Disadvantages

• Ignores cash flows beyond acceptable payback date

• Requires anarbitrary cutoff point
• Biased against long-term projects, such as R&D and new products

Profitability Index (PI):

Advantages

• Considers time value of money

• Considers all cash flows
• Closely related to NPV, leading to same decision most of the time

Disadvantages

• Requires detailed long-term forecasts of a project’s free cash flow

• May lead to incorrect decisions in comparisons of mutually exclusive investments

6. What should the board do ?

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 The board should approve the launch of the Boeing 7E7 Project. There are, however,
inherent risks in this project resulting from the design and materials used. The 7E7 is the
first plane to use a carbon body construction and employ wingtip extenders. This will add
risk to the project since they have never been used on such a large scale project.

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