Boeing 7e7

1. From the case scenario, we see that computed IRR is 15.66%, hence the required rate of return should be at least, say 15.7% to have NPV of the project > 0. There 3 possible scenarios involving NPV: NPV > 0 - the project should be undertaken in the majority of cases; NPV = 0, in we don't loose anything, but we don't again anything either. With a great volatility of the market, it's very easy to go from NPV = 0 to the negative NPV, therefore should be taken with a great caution. NPV< 0 - pretty obvious answer that doesn’t pursue it, unless the goal is not the monetary gain, but rather a market share for a future potential gain.

r = 0.95 %1 * 0.65% + 1.05 (7.6%)

r = 8.93%

EMRP used in our calculations was 7.6%. This is the average EMRP’s from year 1900 to today. Value line betas are calculated form a regression analysis between the weekly percentage change in price of a stock and the weekly percentage changes of the NYSE composite index using the last five years of data. Therefore, the beta is 1.05. When using CAPM, I use 4.56% risk free rate, and 5.5% risk premium. We used the historical Treasury bill rate of return for early 2004 based on the time period when the 7E7 project was proposed to the board.

We considered using the T-Bond rate, however since Boeing can invest in the short term as well, we felt t T-Bills were more appropriate, because they are more conservative.

2. WACC = (0.525)(6.153%)(1-0.35) + (1 – 0.525)(11.28%) = 7.54%. Based on our analysis, Boeing would be profitable across the board as every IRR exceeds our estimated WACC as tabulated in exhibit 9. Even if Boeing sells only 1500 planes and doesn’t have any price premium, the company will realize an IRR of 10.5%, which is higher than the WACC of 7.54%. Similarly, even if the development cost reaches the upper limit of $10 billion and the Cost of Goods Sold is 84% of Sales, IRR is 8.6%, which is still higher than 7.54%. Nonetheless, exhibit 9 reflects the range of return that...