The Boeing 7e7

The Boeing 7E7

Statement of the Problem

In the Boeing 7E7 case Bair must find compelling reasons to convince the board of directors that now is the time to design and release a new commercial aircraft line the 7E7. With the majority still in fear from the September 11 attacks and a deadly SARS outbreak, commercial profits are on a decline for the travel industry. Boeing is contemplating the launch of the new product line because the financial demands set by the board, and the uncertainty of development and product costs. Launching the 7E7 line in uncertain times in the commercial-aircraft industry could prove to be detrimental to the company. The development of the new line would require huge initial upfront costs and could take years to return in profits, all while facing engineering obstacles.

The new 7E7 would have lower operating costs due to increased cargo space and increased fuel economy with a new engine design. The success of the 7E7 is if engineers are capable of an expandable wing. If proven successful in the design the more fuel efficient 7E7 would be constructed primarily with carbon-reinforced material and it would also be versatile for both short and long international flight routes.In addition, Boeing feels that if they do not step up and take risks they could succumb to their major competitor Airbus. If Boeing falls behind regarding innovation and fuel efficiency they will lose their market to Airbus. In order for Boeing to compete in the commercial-aircraft industry, they must take on some risk and develop the 7E7 line.

Alternative Solutions

Use WACC

Use CapM

Analysis of Alternatives

Boeing competes in both the commercial aircraft and the defense business. Thus, deriving the appropriate benchmark WACC for the 7E7 project requires isolating the commercial aircraft component from Boeing's overall corporate WACC. With a calculated WAAC of 7.54% for the commercial division of Boeing, the project is profitable. Assuming the development costs are correctly estimated the reasons to go forward with the project outweigh those against it. For the project to increase shareholder wealth, the IRR of the project should at least equal the WACC, if not greater. Since WACC of 7.54% is considerably less than the projected IRR of 15.7%, the 7E7 project is very attractive. Even if Boeing sells only 1,500 planes and doesn't have any price premium from customers, the company will realize an IRR of 10.5% which is still higher than the WACC of 7.54%. Boeing would have to sell at least 2,500 airliners in the first 20 years

For CapM we must calculate equity beta, we use the information given in Exhibit 10.

Final