Boeing 7e7

The Boeing 7E7 |

Case #16 |

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Table of Contents

I. Statement of the problem

II. Alternative solutions

III. Analysis of the alternatives

IV. Final Recommendations

V. Appendix

Statement of the problem

In 2003 Boeing announced plans to begin designing and selling a more efficient aircraft called the 7E7. Unfortunately these plans came during a very difficult time of economic uncertainty for the airline industry due to deadly illnesses, terrorist activity, and the new war in Iraq. Top management is already hesitant to take on such a project because, after 2 years of development, a similar project in the late 1990s which promised to cut travel time by 15-20% was not well received by Boeing’s potential customers who did not feel that passengers would pay extra for faster flights. In addition to this, the construction of the 7E7 will force Boeing to change its production methods. The last time this was done in 1997 it ended up causing two production lines to be shut down for 30 days and resulted in hundreds of missed aircraft deliveries. However, the company must do something to regain the number one spot in the large plane commercial aircraft industry, which was lost to Airbus the previous year. Under these economic conditions would it be a profitable decision to undertake the Boeing 7E7 based on financial analysis?

Alternative Solutions

WACC

CAPM

Analysis of the Alternatives

Cost of Equity

The 7E7 Project is a risky project. With a beta of 2.540738, which is substantially higher than the stock market average company, volatility is expected in this investment. However, with risk comes a reward. The 7E7 project would need to provide returns of 22.7009% in order to be considered a sound investment.

E(Ri) = .0456+ 2.540738 [.1156 - .0456]

E(Ri) = .0456+ 2.540738 [.07] 

E = 22.345%

Equity Market Risk Premium

As noted in Case Studies in Finance “The arithmetic mean return is the simple average...