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Background

We still have a lot to get done as we move toward authority to offer the 7E7 to our customers. The team is making great progress-understanding what our customer wants, developing an airplane that meets their needs, and defining a case that will demonstrate the value of the program.

In early 2003, Boeing announced plans to design and sell a new, "super-efficient" jet dubbed the 7E7, subsequently called the "Dreamliner." However, news over the next six months depressed the market for aircrafts, which were already in sharp con- traction. The United States went to war against Iraq, spasms of global terrorism offered shocking headlines, and a deadly illness called SARS resulted in global travel warnings. For those and other reasons, airline profits were the worst seen in a generation. This seemed like an incredible environment in which to launch a major new airframe project. Nevertheless, on June 16, 2003, at the prestigious Paris Air Show, Michael Bair, the leader of the 7E7 project, announced that Boeing was making "excellent progress on the development of the 7E7 and continues to be on track to seek authority to offer the airplane." In order to proceed with the project, Bair sought a firm commitment from Boeing's board of directors in early 2004. If the board approved the plan, he could start collecting orders from airlines and expect passengers to start flying on the new jets in 2008. Between now and his recommendation to the board, he would need to complete a valuation of the 7E7 project and gain the support of Boeing's CEO, Philip Condit, and the other senior managers. Would the financial analysis show that this project would be profitable for Boeing's shareholders?

Boeing had not introduced a new commercial aircraft since it rolled out the highly successful 777 in 1994. Later in the 1990s, however, Boeing announced and then can- celled two new commercial-aircraft programs. The most prominent of those was the "Sonic Cruiser," which promised to fly 15% to 20% faster than any commercial aircraft and bragged of a sleek and futuristic design. Unfortunately, after two years of developing the Sonic Cruiser, Boeing's potential customers were sending the message that passengers were not willing to pay a premium price for a faster ride. Boeing was now long overdue to develop a product that would pull it out of its financial slump, as well as help it regain the commercial-aircraft sales that the company had lost over the years to Airbus, its chief rival.

Technical Challenges

With the 7E7, an Airbus executive argued that Boeing seemed to be promising a "salesperson's dream and engineer's nightmare.”1 The 7E7, while carrying between 200 and 250 passengers, would be capable of both short, domestic flights as well as long, international hauls. It would use 20% less fuel than existing planes of its projected size and be 10% cheaper to operate than Airbus's A330-200. At a time when major airlines were struggling to turn a profit, less fuel, cheaper operating costs, and long or short distance flexibility would be a very attractive package at the right price.

Sceptics of the 7E7 were not in short supply and suggested that the name "Dreamliner" was appropriate. To make the plane more fuel efficient, the 7E7 would be the first commercial aircraft built primarily with carbon-reinforced material, which was both stronger and lighter than the traditional aluminium. In addition, Boeing promised greater fuel efficiency by using a more efficient engine. Boeing claimed that the use of composites would also reduce its manufacturing costs. The goal would be to design a plane with fewer components that could be assembled in 3 days as opposed to the current 20 days that it took to rivet together the Boeing 767. The use of composite materials, however, had its risks. Composite materials were suspected as a contributory cause to a 2001 plane crash in New York and, therefore, would have to overcome regulatory scrutiny. Boeing would also have to change its production methods radically. The last time Boeing made a major production change was in 1997 in an effort to cut costs. However, because the process was not smooth, it resulted in two production lines being shut down for 30 days and hundreds of missed airline deliveries.

The ability to produce a short and long distance aircraft would also have to overcome engineering obstructions. Analysts argued that building a plane that would do short hops in Asia and long trans-Atlantic flights would require two versions of the plane with different wingspans.2 Boeing engineers considered the possibility of snap-on wing extensions. The question was whether this would be too costly, as well as being technically feasible.

Finally, there was the matter of Boeing's board. Two of the most powerful members of the 11-person board, Harry Stonecipher and John McDonnell, were rumoured to have raised serious concerns regarding the cost of the 7E7. While the cost of developing the 7E7 project could be as high as $10 billion, there was an imminent veto threat if that number did not shrink by billions. More specifically the board wanted to keep 7E7 development costs down to only 40% of what it took to develop the An additional pressure from the board was to keep the 7E7 per-copy costs to only 60% of the 777 costs. In response, Philip Condit, Boeing's CEO and chair, was quoted as saying that "Boeing has a responsibility to develop jetliners for less.” 3He knew, however, that if Boeing did not take bold risks in the commercial-aircraft industry that their days as a serious competitor to Airbus were numbered.

Financial Risks

Boeing was split into two primary segments: commercial airplanes and integrated defence systems. In 2002, it was awarded $16.6 billion in defence contracts, second only to Lockheed Martin with $17.0 billion. Exhibit 1 shows that in 2002, each segment earned Boeing's revenues almost equally. In addition, while commercial-aircraft revenues had been falling, defence revenues had been rising. Analysts believed that Boeing was able to transfer significant amounts of technology from the defence R&D to the commercial-aircraft segment.

The commercial-aircraft segment produced and sold six main airframes designed to meet the needs of the short- to long-range markets: the 717, 737, and 757 standard- body models and the 747, 767, and 777 wide-body models. As of December 31, 2002, Boeing undelivered units under firm order of 1083 commercial aircraft and had a declining backlog of about $68 billion. For 2003, it projected 280 commercial-aircraft deliveries and expected between 275 and 300 in 2004. Boeing estimated that in 2003, the revenues for its commercial-airplane segment would be approximately $22 billion, down from $28 billion in 2002. Recognizing the negative impact of the September 11th attacks on commercial-aircraft demand, Boeing cut the production rates for 2002 in half in order to maintain profitability in that segment.

Exhibits 2 and 3 show Boeing's balance sheet and income statement respectively. While Boeing's earnings were down significantly from 2001 to 2002, most of this was the result of an accounting change (SFAS No. 142). However, a drop in commercial- airplane deliveries from 527 in 2001 to 381 in 2002 also contributed to the decline.

The long-term outlook for aircraft demand seemed positive.6 Boeing's Market Out- look said the following:

In the short term, air travel is influenced by business cycles, consumer confidence, and exogenous events. Over the long-term, cycles smooth out, and GDP, international trade, lower fares, and network service improvements become paramount. During the next 20 yearn, economies will grow annually by 3.2%, and air travel will continue its historic relationship with GDP by growing at an average annual rate of 5.1 %.

As shown in Exhibit 4, Boeing's 20-year forecast from 2003 to 2022 was for 24,276 new commercial aircraft in 2002, valued at $1.9 trillion. The company predicted a composition of 4,303 smaller regional jets (fewer than 90 seats); 13,647 single-aisle airplanes; 5,437 intermediate twin-aisle airplanes; and 889 747-size or larger airplanes. This prediction reflected a world fleet that would more than double, with one-fourth of the market coming from aircraft replacement and three-fourths from projected passenger and cargo growth.

Competitive Pressures

Exhibit 5 illustrates Airbus's 20-year predictions for the years 2000-2020. Although the report was dated 2002, because of the September 11 attacks, numbers included the year 2000, to serve as a benchmark year. For that period, Airbus predicted the delivery of 15,887 new commercial aircraft in 2002, with a value of (U.S. dollars) $1.5 trillion. This included 10,201 single-aisle aircraft; 3,842 twin-aisle aircraft; 1,138 very large aircraft, and 706 freighters. The 15,887-unit forecast did not include planes with less than 90 seats.

The development of a new airframe was characterized by huge initial cash outflows that might require between one and two decades to recoup. For example, the development costs for the Boeing 777 were rumoured to be $7 billion. Any pricing would not only have to recoup the upfront development costs but also the production costs. In addition, pricing would be subject to rigorous, competitive pressures. In short, because of the financial strains a new product line might create, each new aircraft was a "bet the ranch" proposition. Over time, survival in the industry depended on introducing successful products and having the deep financial pockets with which to survive the initially gushing cash flow.

While aircraft sales were subject to short-term, cyclical deviations, there was some degree of predictability in sales. Sales would typically peak shortly after the introduction of the new aircraft, and then fall. Thereafter, sales would rise and fall as derivatives of the aircraft were offered. Exhibit 6 shows the cycles for the first 20 years of the 757 and 767 sales.

The concept of the Boeing 7E7 was driven by customer requirements. Boeing originally 'J announced in March 2001, its plans to build the Sonic Cruiser, a plane that would fly just below the speed of sound. The success of the Cruiser depended on whether passengers would pay a premium for a faster flight. However, potential airplane customers who had been interested in the Cruiser during a robust, commercial-air travel market were now focusing on survival. The events of September 11 and the bursting of the technology bubble led to a significant decline in airplane orders. As a result, Boeing solicited updated feedback from a number of potential customers who would soon need to replace their aging fleet of mid-range planes, such as the 757s, 767s, A300s, A310s, A321s, and A330s. Overwhelmingly, the revised message from customers was for a plane with lower operating costs.

Outlook for Aircraft Demand

Based on discussions with over 40 airlines throughout the world, Bair identified a fresh market to replace mid-size planes, based not only on lower operating costs, but also on the creation of a mid-size plane that could travel long distances, a feat previously viable by only large planes, such as the Such flexibility would allow airlines to offer nonstop service on routes that required long-range planes but did not justify the subsequent larger size. Bair estimated there to be more than 400 city pairs (e.g., Atlanta-Athens) that could be served efficiently on a nonstop basis by the 7E7.

Boeing was considering two new members for the 7E7 family, a basic and a stretch version. Exhibit 7 gives Boeing's description of the two configurations. Other improvements for passengers included wider aisles, lower cabin altitude, and increased cabin humidity. In addition, the planes would include systems that provided in-flight entertainment, Internet access, real-time airplane systems and structure health monitoring, and crew connectivity. Furthermore, Boeing claimed the 7E7 would have the smallest sound "footprint" with the quietest takeoff and landing in its class.

Exhibit 8 contains a 20-year forecast of free cash flows from the Boeing 7E7 project consistent with public information released by Boeing, Airbus, analysts, and other experts in the field. See the Appendix for detailed forecast assumptions. The primary implication of the forecast is that the 7E7 project would provide an internal rate of return (IRR) close to 16%. This assumes that Boeing would not only deliver the promised plane specifications, but that Airbus would be unable to replicate the 7E7 efficiencies.

Based on both analysts' and Boeing's expectations, the base case assumes that Boeing could sell 2500 units in the first 20 years of delivery. Pricing was estimated using 2002 prices for Boeing's 777 and The 7E7 would be a hybrid of the two planes in terms of the number of passengers and range. By interpolating between the 777 and 767 prices, it was possible to estimate the value placed on the range and number of passengers. Using this methodology, without any premium for the promised lower operating costs, the minimum price for the 7E7 and 7E7 Stretch was estimated to be $114.5 million and $144.5 million, respectively, in 2002. The forecast assumed that customers would be willing to pay a 5% price premium for the lower operating costs.

The IRR, which is consistent with "base case" assumptions, was 15.7%. But, the estimate of IRR was sensitive to variations in different assumptions. In particular, some obvious uncertainties would be the number of units that Boeing would be able to sell and at what price. For example, if Boeing only sold 1,500 units in the first 20 years, then, as shown in Exhibit 9, the IRR would drop to 11 %. This might occur if air travel demand worsened, or if Airbus entered this segment with a new competing product.

Conclusion

Additional unknown variables were the development costs and the per-copy costs to build the 7E7. Boeing's board was anxious to minimize those costs. The forecast assumes $8 billion for development costs; however, analyst estimates were in the $6 billion to $10 billion range. The cost to manufacture the 7E7 was also subject to great uncertainty. On the one hand, engineers were challenged to build a mid-size air- craft with long-range capabilities. The engineering design to achieve this could push building costs up significantly. Conversely, if Boeing succeeded in using composite materials, which required a fraction of the normal assembly time, then construction costs would be lower. Consistent with Boeing's history, the base case assumes 80% as the percentage of cost of goods sold to sales. As shown in Exhibit 9, however, the IRR of the 7E7 was very sensitive to keeping production costs low.

Boeing's weighted-average cost of capital (WACC) could be estimated using the following well-known formula:

WACC = Wd rd (1- t) + We re

Where:

Wd = Proportion of debt in a market - value capital structure rd = Pre-tax cost of debt capital

t = Marginal effective corporate tax rate

We = Proportion of equity in a market - value capital

structure re = Cost of equity capital

Exhibit 10 gives information about betas and debt/equity ratios for Boeing and comparable companies. Exhibit 11 provides data about Boeing's outstanding debt issues. While Boeing's marginal effective tax rate had been smaller in the past, it currently was expected to be 35%. In June 2003, the yield on the three-month U.S. Treasury bill was 0.85%, and the yield on the 30-year Treasury bond was 4.56%. On June 16, 2003, Boeing's stock price closed at $36.41.

Analysts pointed out that Boeing actually consisted of two separate businesses: the relatively more stable defence business and the conversely more volatile commercial business. Defence corporations were the beneficiaries when the world became unstable due to the terrorist attacks on September 11, 2001. Furthermore, the United States, along with some of its allies, went to war against Iraq on March 20, 2003. While Bush declared an end to major Iraqi combat operations on May 1, 2003, as of June 16, the death toll in Iraq continued to rise on a daily basis. A different type of risk emanated with the outbreak of SARS. On February 1, 2003, China announced the discovery of the deadly and contagious illness that subsequently spread to Canada and Australia. As of June 16, travel warnings were still outstanding. Thus, the question arose of whether one should estimate Boeing's cost of capital to serve as a benchmark- required rate of return. Would a required return on a portfolio of those two businesses be appropriate for evaluating the 7E7 project? If necessary, how might it be possible to isolate a required return for commercial aircraft?

Question 1

Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?

Question 2

  1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7?
  2. Critically discuss why the capital asset pricing model is not used to estimate the firm’s cost of capital directly.
  3. Use the capital asset pricing model to estimate the cost of equity. Which beta and risk-free rate did you use? Critically discuss.
  4. When you used the capital asset pricing model, which risk-premium and risk-free rate did you use? Critically discuss.
  5. What is the Boeing’s Cost of Debt?
  6. Is debt not also subject to commercial and defence risk, and should one therefore back out the commercial risk component?
  7. Critically discuss why not simply use the CAPM to estimate the cost of debt.
  8. Should one calculate a weighted average of all debt or a weighted average of long-term debt with maturities that match the length of the project?
  9. Which capital-structure weights did you use? Critically discuss.

Question 3

  1. Judged against your WACC, how attractive is the Boeing 7E7 project?
  2. Under what circumstances is the project economically attractive?
  3. What does sensitivity analysis (your own and/or that shown in the case) reveal about the nature of Boeing’s gamble on the 7E7?

Question 4

Should the board approve the 7E7? How would we know if the 7E7 project will create value?

Background

Four reasons are inherent for Boeing to launch the 7E7 project, which are discussed briefly as follows:

  • Boeing had not introduced any new aircraft for greater timeframe. Hence, creating a new product could help the organisation in regaining the market of commercial aircraft from its main rival (Atanasov and Black 2016). The main rival of Boeing is Airbus, which had 57 additional commercial orders in contrast to Boeing in 2002.
  • The 7E7 project concentrates on cost minimisation and fuel efficiency improvement, which would reduce the operating cost of Boeing greatly.
  • The project could enhance the short and long distance flexibility of places for satisfying the demands of more customers along with allaying their concern regarding aging fleet of mid-range planes after 911. Moreover, taking into account the long-term business cycle, the air travel carries on its past association with GDP having an annual growth rate of 5.1% (Avdjiev, McCauley and Shin 2016).
  • Finally, the rising demand of cargo and the creation of ¾ market premium with the help of estimated passengers could help in developing the business of commercial airline.

However, the time is not appropriate for Boeing to launch the 7E7 project. This is because technological problems could result in additional risk of failure and the requirement of initial investment is high. Hence, creating a plane flying short as well as long distances needs two different versions of the plane having different wingspans (Bazdresch, Kahn and Whited 2017). In fact, after the 2001 plane crash, there is risk in using the composite materials. Moreover, SARS, Iraq war and international terrorism lead to international travel warnings. Thus, the real market demand was seen as the worst during these years.

a:

Based on the provided case study, the computed IRR has been 15.7%. Hence, the required rate of return need to be equal to at least 15.7%. In case, NPV is greater than zero, the project could be undertaken. On the other hand, if the NPV is less than zero, the project must be rejected. If NPV is equal to zero, the project could be undertaken with utmost caution.

b:

The Capital Asset Pricing Model (CAPM) could be used in estimating the cost of capital of the organisation directly; however, in practice, it is never utilised for that purpose. A true asset beta could not be observed, as the items on the left-hand side of the statement of financial position are not traded ordinarily in liquid markets. In theory, beta could be derived for both debt and equity and they need to be weighed based on the market values of the shares, which would provide a projection for the asset beta of the organisation (Benmelech 2016). Alternatively, the equity beta could be unlevered to derive an asset beta. The insertion of asset beta into CAPM would fetch an estimate of the cost of capital of the organisation. However, these two methods invite error of estimation at a later point of time.

c:

Computation of Cost of Equity:-

Particulars

Details

Units

Risk-free rate

A

4.56%

Beta

B

1.17

Market risk premium

C

4.30%

Cost of equity

A + (B*C)

9.59%


After looking at the financials of the organisation (NYSE: BA), the computed beta could be found, which is 1.17. Beta is derived by obtaining the financial reports about the organisation, which primarily depicts the fluctuation of Boeing’s stock in relation to S&P index. In other words, if the historical values of the stock of the organisation and S&P index were plotted against each other, beta would be the slope of the best-fit straight line in the graphical data. The risk-free rate is the annual percentage yield of the three-month Treasury bill, which is taken as the standard risk-free rate (Berk et al. 2013).

Technical Challenges

d:

In the words of Com and II (2016), risk premium is the additional return that the stock of an organisation provides over a risk-free rate. Such return compensates the shareholders for taking on relatively greater risk of the equity market in contrast to the risk-free rate. Hence, in order to compute the same, the expected rate of return is taken from which the risk-free rate is deducted.

Risk premium = Expected rate of return – Risk-free rate = (Dividend yield + Growth rate of dividends) – Risk-free rate = 8.86% – 4.56% = 4.30%. In this case, the growth rate of dividends and dividend yield is collected from the financial ratios and data of the organisation, which is available at finance.yahoo.com. The risk-free rate is the annual percentage yield of the three-month Treasury bill, which is taken as the standard risk-free rate.

e:

According to Exhibit 11 having series of bond with value $393 million, coupon at 6.125% and maturity in 2033 after 30 years have been taken into account. This is because it is the most effective proxy for the project and its time horizon is 30 years as well. The yield on such bond is 5.85%, which is the pre-tax cost of debt of the organisation.

Computation of Cost of Debt:-

Particulars

Details

Units

Pre-tax cost of debt

A

5.85%

Tax rate

B

35%

After-tax cost of debt

A * (1-B)

3.80%

f:

Debt is subject to defence and commercial risk as well, which denotes the validity of this point. However, this has very little issue compared to equity, since debt is a senior security (Damodaran 2016).

g:

While the CAPM is not limited to instruments of equity in theory and while the beta of every issue of debt is possible to project in case of public trading, solving for the yield-to-maturity of a bond utilising the current market data avoids each assumptions and weaknesses present in CAPM (Flannery and Hankins 2013). The sole reason behind using the CAPM model to estimate equity is that unlike an instrument of bond, in which the principal and coupon payments are known with a fair extent of certainty, the expected cash flows are not known over the potential infinite life of the equity security (Dhaene et al. 2017). Hence, the CAPM model is not used to estimate the cost of debt.

h:

According to the theory, weighted average of each debt risk is a function of the asset risk on the left-hand side of the statement of financial position. However, it would be a debatable situation, if debt risk is sorted further by matching debt maturity to the project length (Ehrhardt and Brigham 2016). At the time of picking the instrument of debt, in which maturity matches the project length, it might be intuitive pleasingly. However, there might be a counterargument regarding the move of Boeing, if it had short-term debt only.

Financial Risks

For Boeing, sensitivity analysis discloses little deviation between the two approaches. A weighted average of all debt maturing after or on 2031, would lead to a cost of debt of 6.03%. This contrasts to 5.33% using a weighted average of the available debt information. As a result, this would change WACC from the base case of 16.7% to 16.9%.  

i:

From the theoretical perspective, an analyst is needed to use market value by not taking into account the book value weights. According to Exhibit 10, the debt-to-equity ratio or market value for Boeing has been obtained as 0.525. Based on this information, the percentage of debt and equity could be derived (Ferran and Ho 2014). The percentage of debt is provided as 34.4% and the percentage of equity is provided as 65.6%.

a:

Computation of WACC:-

Particulars

Details

Units

Equity beta

A

1.45%

Risk-free rate

B

4.56%

Expected market return

C

11.70%

Cost of equity

D

9.59%

Cost of debt

E

3.80%

Debt/equity

F

0.525

Weight of debt

G

0.344

Weight of equity

H

65.60%

Tax rate

I

35%

WACC

(D*H)+E*(1-I)*G

7.14%

 
Most of the organisations compute WACC for providing the investors a projection on profitability along with the ability to weigh future projects. For computing the WACC, the current bonds of Boeing including the long-term debt portion of capital and the assets of Being comprising of the equity portion of capital have been taken into consideration (Foley and Manova 2015). However, other weighted entities like preferred shares are not taken into consideration for the calculation of WACC. The debt/equity ratio would enable in calculating weights. Boeing would require earning at least 15.443% return on investment for maintaining the actual share price.

b:

There are various circumstances for an economically attractive project and they are described as follows:


Sale of airliners:

This project would be attractive from the economical perspective, if Boeing could sell adequate number of planes within limited timeframe beyond a certain price. The internal rate of return or the hurdle rate that provides NPV of zero is 15.7%. This implies that Boeing needs to sell a minimum of 2,500 airliners within the initial 20 years at 0% price premium or higher for this project for enhancing the overall wealth of the shareholders.

Market demand:

The US had some of the lowest number of passengers in the recent history. A reverse of such trend is vital in reaching some of the estimated revenue numbers, which Boeing is counting on. Several influential dynamics are inherent to such lower numbers (Fracassi 2016).A fall in business travel had taken place because of cost and the development of conferencing technologies. Finally, the weak economy had vacationers planning to visit local destinations rather than travelling abroad.

Competitive Pressures

Market share:

The strongest rival of Boeing is Airbus. It is important that the new 7E7 meets its commitment of lower operational cost. This would enable in capturing greater market share (Gullifer and Payne 2015). It would become highly significant; in case, the economy failed to recover quickly in accordance with the expectations. The other aspects of the success of 7E7 denote the engineering associated with an expandable wing. By adding this versatility, the owner of 7E7 would provide greater options for travel routes.

c:

The intention of sensitivity analysis is to obtain cash flows in relation to the overall project variables. Boeing had to ascertain the underlying variables, which are the development costs in this case and per-copy costs in forming 7E7. Depending on the above sensitivity analysis, it denotes that the nature of gamble of Boeing on the 7E7 is high. Based on the provided case information, it is anticipated that the development costs would be $8 million with a base case assumption of 80% in the form of percentage of cost of sales to sales. This would fetch an IRR of 15.7%; however, if the costs had been $10 million with 84% assumption, the IRR would be 8.6%. Hence, the gamble is greater due to the swing of the development costs to $4 million and the variance of IRR to 12.7.

After careful consideration of the benefits and risks of the 7E7 project, it is recommended to the Board of Directors to carry on with the project. However, there are some inherent risks involved in this project, which arise from the materials used and design (Hillier et al. 2013). The 7E7 is the first plane in using a construction of carbon body along with employing wingtip extenders. This would include risk to the project, as they had not been used on such a big scale project.

The supply chain is extremely large and spread around the world. This would result in challenges handling this contract network. Various parts of the plane are constructed entirely in other nations and then sea is used as means for shipping them to the Seattle facility of Boeing for the final assembly. As a result, the inherent risk of the project would be increased, if any contract did not deliver on time (Lerner and Seru 2017).

One of the close competitors of Boeing is Airbus. They had planned to introduce new A380 in 2005 in the market. This plan would pose intense competition on 7E7. In case, Boeing fell behind in relation to fuel efficiency, innovation and the other attributes of a long-haul airliner, it would lose its share in the market. For Boeing to keep up with the industrial competition, some risks need to be taken and it needs to form this new plane. In addition, the volatility of the economy has compelled the airlines to search for option in order to minimise their operating costs (Scholes 2015). The 7E7 would carry additional passengers per flight in a way, which is fuel-efficient and it enables the airlines to justify buying the plane. The success associated with the expandable wing would provide attractive versatility to the plane.

Outlook for Aircraft Demand

In order to increase the wealth of the shareholders, Boeing could sell a minimum of 2,500 aircrafts over 20-year period at the time of keeping development costs at or below $8 billion and cost of sales as percentage of sales below or at 80%. In case of cost overruns, the cost of sales as a percentage of revenue needs to stay lower than or at 78%, as per Exhibit 9.

The risk premium of the equity market needs to be identical to the excess return, which the investors expect on the market portfolio. In this case, the market risk premium is obtained as 4.30%. The weighted average cost of capital has been obtained as 7.14%. As the estimated revenues listed on Exhibit 8 are well-behaved, the IRR tables could be trusted listed on Exhibit 9. For the project to raise the wealth of the shareholders, the WACC should be equal to the hurdle rate of the project (Vernimmen et al. 2014). For accomplishing the same, Boeing would have to sell a minimum of 2,500 airliners within a 20-year period. Boeing had expected to reach this unit goal.

As provided in the report, the financial computations depict a high probability for the project to raise the wealth of the shareholders. The other risks are discussed above, which need to be taken into consideration. However, on balance, the reasons to progress ahead with the project outrun those against it.

References:

Atanasov, V. and Black, B., 2016. Shock-based causal inference in corporate finance and accounting research.

Avdjiev, S., McCauley, R.N. and Shin, H.S., 2016. Breaking free of the triple coincidence in international finance. Economic Policy, 31(87), pp.409-451.

Bazdresch, S., Kahn, R.J. and Whited, T.M., 2017. Estimating and testing dynamic corporate finance models. The Review of Financial Studies, 31(1), pp.322-361.

Benmelech, E., 2016. Discussion of Patrick Bolton’s “Corporate Finance, Incomplete Contracts, and Corporate Control”. In The Impact of Incomplete Contracts on Economics. Oxford University Press.

Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V. and Finch, N., 2013. Fundamentals of corporate finance. Pearson Higher Education AU.

Com, M. and II, S., 2016. International Finance.

Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and corporate finance (Vol. 324). John Wiley & Sons.

Dhaene, J., Hulle, C., Wuyts, G., Schoubben, F. and Schoutens, W., 2017. Is the capital structure logic of corporate finance applicable to insurers? Review and analysis. Journal of Economic Surveys, 31(1), pp.169-189.

Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage learning.

Ferran, E. and Ho, L.C., 2014. Principles of corporate finance law. Oxford University Press.

Flannery, M.J. and Hankins, K.W., 2013. Estimating dynamic panel models in corporate finance. Journal of Corporate Finance, 19, pp.1-19.

Foley, C.F. and Manova, K., 2015. International trade, multinational activity, and corporate finance. economics, 7(1), pp.119-146.

Fracassi, C., 2016. Corporate finance policies and social networks. Management Science.

Gullifer, L. and Payne, J., 2015. Corporate finance law: principles and policy. Bloomsbury Publishing.

Hillier, D., Ross, S., Westerfield, R., Jaffe, J. and Jordan, B., 2013. Corporate finance. McGraw Hill.

Lerner, J. and Seru, A., 2017. The use and misuse of patent data: Issues for corporate finance and beyond (No. w24053). National Bureau of Economic Research.

Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance: theory and practice. John Wiley & Sons.

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