Assessing Boeing 7E7

International Finance & Decision Making

Table of Contents
INTRODUCTION...........................................................................................................................1
QUESTION 1..................................................................................................................................1
Assessing Boeing’s 7E7 project...................................................................................................1
QUESTION 2..................................................................................................................................2
A. Appropriate required rate of return against IRR from Boeing 7E7........................................2
B. Critical discussion of not adopting CAPM..............................................................................2
C. Critical discussion of beta and risk-free rate...........................................................................2
D. Critical discussion of risk premium and risk-free rate............................................................3
E. Boeing’s cost of debts..............................................................................................................4
F. Debt’s risk................................................................................................................................4
G. Critically discuss why CAPM is not used for cost of debt.....................................................4
H. Calculation of weighed average of all debt or weighted average of long-run debt................5
I. Weights used for capital structure............................................................................................5
QUESTION 3..................................................................................................................................5
A. Judgements relevant with WACC which indicates the attractiveness of project....................5
B. Economically attractive project under various conditions......................................................6
C. To analyse the nature of Boeing gamble the sensitivity analysis will be considered.............6
QUESTION 4..................................................................................................................................7
Profitability of 7E7 in terms of revenue generation.....................................................................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
To initiate a project there is essential need of analysing the profitability of the project to
be determine. In the present report there will be identification of the fruitfulness of project 7E7
of Boeing will be measured as per WACC and various tools. The professionals at the firm will be
suggested as per the measurement like NPV, ARR and payback period which will help them in
planning and decision-making. Thus, with the help of such techniques the business will be
fruitful in terms of making the adequate initiation of the proposed project.
QUESTION 1
Assessing Boeing’s 7E7 project
Boeing is an America’s one of the leading multinational organization that manufactures
and distribute airplanes, rockets, rotocraft and satellite worldwide. Boeing operates in aerospace
defense, which is a highly competitive sector, in which; companies are struggle with introducing
innovation to grab success in the market. It had planned to launch “super-efficient” jet dubbed
7E7, subsequently known as “Dreamliner”. It will carry out 200-250 passengers, consume less
fuel and would be cheaper. It will be definitely an attractive package because in current times,
when all the airlines are struggling in order to derive profit, less fuel, cheaper cost and flexibility
choices for both short or long distance is a strong market opportunity for the firm. It will enable
Boeing to strengthen its competitive position to compete with one of the strong competitor,
Airbus. It will be its first commercial aircraft designed with carbon-reinforced material, which is
stronger and lighter than aluminium. Besides fuel efficiency, as it will use composite material,
therefore, manufacturing costs can be minimizing leads to maximize profitability.
However, launching 7E7 now is not a good time to do so because global terrorism and
technological bubble resultant considerable decline in the airplane ordering. In addition, although
launching it at an beginin point would be a profitable option but competitive can duplicate the
item in future. Therefore, uncertain 7E7 specification and competitive pressure will create
downward pressure on demand as well as price. Although the project is subjected to several
engineering and technical difficulties and requires too much cost, still, demand of the
commercial aircraft in long-run seems positive due to smooth industry cycle, international
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trading, less fare charges and technological improvement that will drive larger demand. During
next 20 years, economy expected to grow at 3.2% and air travelling will continue retain its
relationship with GDP by growing at average growth rate of 5.1%.
QUESTION 2
A. Appropriate required rate of return against IRR from Boeing 7E7
Required rate of return or WACC indicate the rate which company expects to pay off to
all its security holders in order to finance their assets taking into account both debt and equity.
WACC :weight of equity∗Kd (1−tax rate)+ Ke∗weights of equity
Long-term debt 12589
Shareholder’s equity 7696
Cost of debt 8%
Cost of equity 3%
Marginal tax rate 35%
Weight of debt 62%
Weight of equity 38%
WACC 4.09%
B. Critical discussion of not adopting CAPM
CAPM is an equity valuation methodology that assumes that investor is unable to borrow.
However, weighted average cost of capital assign weight to both the source of capital: debt and
equity (Alti and Tetlock, 2014). Here, debt had allowed by the tax shields whereas no deduction
is available on equity. As the new planned project consumes a lot of cost and company will also
borrow money from the financial institution, therefore, WACC needs to be used rather than using
directly the cost of capital found in CAPM.
WACC =(Weight∗r d)(1−tax rate)+ weight∗r e ¿
CAPM’s rate can be directly use only in the case, when project is financed only through
equity without any debt.
C. Critical discussion of beta and risk-free rate
As earlier discussed, that CAPM is used to determined cost of equity (Ke/Re) calculated
using following formula:
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