Compass Record

Summary case study 2 : The Boeing 7E7

Boeing had historically held the lead in this market, however in recent years, its main competitor, Airbus, had become number one. In 2003, Boeing announced plans to design and sell a new jet known as the 7E7, and subsequently called the ‘Dreamliner’. The current environment was unfavourable, with issues such global terrorism, war and the SARS virus causing airline profits to be the worst witnessed in a long time.   However, Boeing was aware that if they did not take risks in this sector they could no longer viably compete with Airbus. The 7E7 design was driven by customer requirements. It would be the first commercial aircraft to be built primarily with carbon-reinforced material. It promised to be fuel efficient due to a more efficient engine. The supply chain is very large and spread over the globe. This will lead to challenges managing this network of contractors. There are many part of the plane that are being fully constructed in other countries and then shipped by sea to Boeing’s Seattle facility for final assembly. This will add to the inherent risk of the project if any of these contractors fail to deliver on time. Airbus is a close competitor. They will be coming to market with their new A380 in 2005. This plane will be a formidable competitor to the 7E7. The equity market risk premium should equal the excess return expected by investors on the market portfolio. In this case it was calculated to be 7.14%. The weighted average cost of capital (WACC) was calculated to be 15.443%.For the project to increase shareholder wealth, the IRR of the project should at least equal the WACC. To achieve this Boeing would have to sell at least 2500 airliners in a 20-year period. Boeing is expecting to reach this unit goal. The financial calculations provided in this report show that there is a very good chance that the project will increase the wealth of the shareholders. There are other risks mentioned above that must be...