Boeing Case Analysis

Financial Report for Boeing 7E7 Project

The Boeing 7E7 project is really important for Boeing Company as it decides whether Boeing can gain the market share of commercial-aircraft segment back from Airbus. In this report, we will evaluate whether the 7E7 project can be profitable for Boeing.

1 Cash Flow

According to the research of Michael Bair, the leader of the 7E7 project, the annual free cash flow is calculated by after-tax profit subtracting capital expenditure then adding depreciation add-back. This project started to bring a positive free cash flow since year 2010.

2 Capital Budgeting Decision Rules

Our group decided to use two capital budgeting decision rules to evaluate this project – IRR and NPV. For the IRR, as we have the sensitivity analysis of project’s IRR, this method is plausible. What we need to do is find out the appropriate range of price premium and unit volume to narrow the range of possible IRRs and find the rate of WACC to compare against this range.

However, to know exactly how much this project will bring to Boeing, we need to calculate the NPV as IRR method is blind to size. Luckily, we can calculate the rate of WACC. Together with the predicted free cash flow and initial investment provided, the NPV of this project will also be available.

3 Discount Rate

To get the project’s proper discount rate, we follow the weighted average cost of capital formula. Thus we need to estimate the project’s beta, cost of debt, cost of equity and the project’s leverage. All the data of necessary inputs can be found in Appendix Exhibit A.

3.1 Project’s Beta

The Boeing Company operates in two different business segments: commercial plane and defense plane. As the 7E7 project is of the former segment, we use the bottom-up method to get the beta of the commercial plane segment as the estimation of 7E7’s project beta.

Year 2003 was rather a tricky year with many volatilities to aerospace industry, so the short-term beta is not...