Boeing

Boeing 7E7 Case

Prepared By:

Jamie Bell

Azuree Arias

Justin Leins

Alma Meleqi

February 21st, 2011

The decision for Boeing to undertake the 7E7 project depends on the value that it will add for shareholders. If the 7E7 can produce an internal rate of return that is greater than the cost of capital for the project, it will offer positive value for the company and its shareholders. Isolating the specific risk of the commercial industry and determining the appropriate inputs for WACC are critical in evaluating the project and the potential that it has. It is also extremely important to assess the sensitivity of both the WACC and the IRR to variables used in their computations. With such a costly project, it is necessary to appropriately estimate and evaluate all scenarios in order to make the best possible decision for shareholders.

Computing the cost of equity is often the most difficult aspect of WACC. There are many variables that must be estimated and considered when using the CAPM approach. The current risk-free return, in 2003, on 30-year T-bills is 4.56%. This will be used because the expected life of the Boeing project is forecasted to be beyond 30 years. The market risk-premium is estimated in two different ways, one using an average return over a 74-year period and another using a more volatile period of 30 years. These different time frames are used to give both a conservative market prospect, as well as an outlook that is more indicative of the recent past. The current 30-year T-bill rate is subtracted from these market estimates to get the market risk-premiums of 7.26% and 8.98%, respectively. Published estimates of the 74-year equity market risk-premium, at June 2003, are not used because these estimates are compared to the 30-day T-bill, which does not follow the time horizon of the project. Since the commercial segment of Boeing is considered more volatile then the relatively stable defense segment, the computation of an...