Case 16 Boeing 7e7
October 15th, 2009
Management Summary 1
Cost of Equity 1
Equity Market Risk Premium 1
Risk Free Rate 2
Capital Structure Weights 2
Boeing 7E7 Project Evaluation 4
Circumstances for an economically attractive project 4
Market Demand 4
Market Share 4
Sensitivity Analysis 4
Board approval for the project? 7
Appendix A 7
This report seeks to answer the following three questions about the Boeing 7E7 project:
1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7?
a. Please use the capital asset pricing …show more content…
As expected, the WACC for the commercial division is much higher due to the riskier aspect of this investment that impacts the cost of equity capital.
Boeing 7E7 Project Evaluation
Circumstances for an economically attractive project
The project would be economically attractive if Boeing could sell enough planes in a given time period above a certain price. The hurdle rate, or the internal rate of return that gives the project an NPV of zero is 15.4% according to our calculations. This means that Boeing would have to sell at least 2,500 airliners in the first 20 years at 0% price premium or greater for this project to increase the wealth of shareholders
The United States has had some of the lowest passenger numbers in recent history. A reverse of this trend is crucial to reach some of the projected sales numbers that Boeing is counting on. There are several factors to these lower numbers. A decrease in business travel has occurred due to cost and the advance of conferencing technologies. And lastly, the weak economy has vacationers thinking of local destinations instead of traveling abroad.
Boeing’s fiercest competitor is Airbus. It is crucial that the new 7E7 delivers on its promise of lower operating cost. This will help command a larger share of the market. This becomes even more important if the economy doesn’t recover as quickly as we hope. The other aspect of the