Boeing case

14.    Judged against your estimate of the WACC, how attractive is the Boeing 7E7 project? Under what circumstances is the project economically attractive?

WACC analysis shows that the commercial division has a much higher WACC. The weighted average cost of capital in this division is much higher due to the impacts on the cost of equity arising from the riskier aspect of this investment.  Boeing 7E7 project would be economically attractive if the firm would sell enough planes in a particular period at a higher price. Using WACC as the hurdle rate, the firm would have to sell more airliners in the first 20 years at 0% or greater price premium for in order to increase the wealth of shareholders.

15.    What does sensitivity analyses reveal about the nature of Boeing’s gamble on the 7E7?

The sensitivity analysis reveals that the 7E7 is a high gamble.  The sensitivity analysis, the forecast shows that a base case assumption of 80% of COG to sales would be the result of $8M in development cost. An IRR of approximately 16% would be earned. If development cost of $10M with an 84% assumption would be used, it would result in an IRR of approximately 8.6%.  This means that the gamble is high because the development costs and the IRR show a significant variance given a best case and a worst case scenario,

16.    Should the board approve the 7E7?

After careful consideration of both benefits and risks, the board should approve the 7E7project provided there are no other more attractive investments. The project generates a positive NPV and falls within limits set forth in the sensitivity analysis.  However, the project also faces some inherent risks such as large supply chain, project design, and competition. 

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