Financial Analysis of Boeing 7E7 Project: A Comprehensive Report

This report provides a comprehensive financial analysis of Boeing's 7E7 project, examining various aspects of financial decision-making. The analysis begins with the rationale behind the project's launch, considering factors such as market competition and technological advancements. It then delves into determining the appropriate rate of return using WACC, exploring the cost of capital without CAPM, and applying CAPM to analyze the cost of equity, considering risk-free rates and beta. The report also assesses the cost of debt, the relationship between debt and commercial/defense risks, and the application of CAPM in determining debt costs. Furthermore, it evaluates the project's attractiveness using metrics like ARR, NPV, and payback period, including sensitivity analysis. The report concludes with a discussion on the project's value and its implications for Boeing's financial strategies, offering recommendations for effective financial execution and competition with rivals like Airbus.

International financial &
decision making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 1...................................................................................................................................1
Reasons fort Boeing contemplating for launch of 7E7 project..............................................1
QUESTION 2...................................................................................................................................1
A. Determining the appropriate rate of return for the prospective IRR from Boeing 7E7
project.....................................................................................................................................1
B. To determine the cost of capital without using capital assets pricing model....................2
C. Implicating the use of capital assets pricing model to analyse cost of equity with risk free
rate and beta rate.....................................................................................................................2
D. Application of Capital assets pricing model on risk free rate and risk- premium.............3
E. Analysing the cost of debt for Boeing...............................................................................3
F. Relationship of debt with commercial and defence risk....................................................3
G. Analysing the use of CAPM in terms of determining the cost of debts............................4
H. To analyse the length of project the estimation belongs to weighted average debt and long
terms debts..............................................................................................................................4
I. Determine the capital structure weights to be use...............................................................4
QUESTION 3...................................................................................................................................5
A. Judgement relevant with WACC and the attractiveness of the project Boeing 7E7.........5
B. Economically attractiveness of the project under several conditions................................5
C. Sensitivity analysis in relation with the Boeing's gamble.................................................6
QUESTION 4...................................................................................................................................6
Valuable the project 7E7 for the board...................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX......................................................................................................................................9

INTRODUCTION
Financial decision is the prime requirement of the business which will be fruitful for the
business in terms of making the adequate operational activities in the long run. In the present
report there has been discussion based on Boeing's 7E7 project. Therefore, this will be fruitful
for the manages in terms of having the adequate financial execution and the suggests relevant
with the cost of capital, debts and equity. The advices will be presented to the managers as to
make proper increment in the operations of business as well as the launch of these aircraft project
to compete with competitors like Airbus.
QUESTION 1
Reasons fort Boeing contemplating for launch of 7E7 project
In consideration with the increment in the competitors and technology there is need to
have an up gradation in the operations and designs of the aircraft. Boeing has planned to launch
the 7E7 project which will be consists of various new features and design. In respect to such
planning they decided to launch an aircraft with having two different configurations such as
reducing the cabin altitude as well as increasing the cabin's Humidity. On the other side, while
considering the increment in the terrorist activities there will be huge risks which are relevant
with the problems which are being faced by an aviation industry and need to have strong security
systems (Dutta and Nezlobin, 2017). Other than this, the main obstacle in the operations of the
business is presented by rivalries such as Airbus is giving the tough competition to Boeing.
Therefore, it can be said that this is not a time to have a launch of this project in spite of this,
they must make strong plans and have increment in the technology.
QUESTION 2
A. Determining the appropriate rate of return for the prospective IRR from Boeing 7E7 project
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In order to analyse the adequate rate of return which is aimed at reducing the costs of
production, there has been measurement of WACC is presented. The current WACC is 2.76%
which is comparatively lower than the 3.39% of WACC which indicates that the Cost of capital
is adequate (Creedy and Gemmell, 2017). Therefore, it includes the measurements for the
elements such as debt amount for 4328, equity amount at 7696 etc. the rates of various taxes
were also been mentioned such as cost of debt before tax is 8%, cost of equity art 3% and the
corporate tax of 35%. Therefore, the weighted debts is for 36% and weighted equity is for 64%
were measured.
B. To determine the cost of capital without using capital assets pricing model
In consideration with determining the cost of capital there has been implementation or
influences of various components which are useful in measuring it. Therefore, in this project
there is not any use of such components so it will not be possible in terms of measuring the cost
of capital. There will not be implication of CAPM in terms of computing the cost of capital while
WACC will be useful as it includes the same elements such as Corporate tax cost of debts etc.
thus, it can be said that with using the CAPM this not possible to analyse the cost of capital
(Biørn, 2017).
C. Implicating the use of capital assets pricing model to analyse cost of equity with risk free rate
and beta rate
Interpretation: In terms of identifying the cost of equity the capital asset pricing method
is the very useful method. Therefore, due to implications of this method the cost equity was
measured at 3% which is adequate and appropriate. Thus, it indicates that to launch this project
the firm will require less capital as well as they have the risk free rate for 0.85%. There has been
measurement for the beta on the basis of 60 days of share trading which are highly volatile in
nature so the 3-6 month of the period is to be considered while measuring it (Levi and Welch,
2017).
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D. Application of Capital assets pricing model on risk free rate and risk- premium
Risk free rate: This is the factor and a rate which an investor expected from the
investments he has made for specific time. Therefore, it will be known as the investment from
the zero risks and have the favourable returns in the coming time. Here, the 0.85% of the risk has
been estimated for the short term investment in the project which shows that there is no variation
between market return and the risk free rate (Olson and Pagano, 2017).
Risk Premium: This is the component which considers the risk free rate of return will be
considers to the risk premium. Therefore, it can be said that it is and profitable compensation for
the investors over the amount of capital they have invested in the project. Here, the risk premium
is 1.15% which is being computed as to deduct the market return for 2%. However, it is because
of the market environment is not healthy for the business as well as it will not facilitate the risk
free returns to the investors (López Prol and Steininger, 2017).
E. Analysing the cost of debt for Boeing
Interpretation: the aim behind measuring the cost of debt which helps in analysing the
rate of interest a firm will pay over its borrowings and withdraws. This is to be considers as per
the income taxes to be paid by firm so there is two outcomes were mentioned such as Cost of
debt after tax and before tax. The cost of debt before tax is 7.59% while deducting the corporate
tax for 35% the cost of debt after tax will be analysed as 5%. However, there has been use of
debts systematic approach which helps in presenting Boeing's cost of debt.
F. Relationship of debt with commercial and defence risk
In accordance with analysing the relationship between debts and commercial risk. There
has been a strong boding between them. The debts cannot be paid by a firm without considering
the commercial risks. Thus, it can be said that Boeing need to take necessary steps as well as
plan strategies to control the debts risk (Borello and et.al., 2017). Therefore, in this regard the
firm usually make exceeding payments to the shareholders or investors which will be helpful in
the long run as if the firm will have any financial crisis they will have enough amount of money
to make the adequate payments to their creditors. However, in accordance with having the long
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term benefits there is need to have the proper execution of the current business operations and
make strategic plan to control the debt risks. On the pother side, while considering the defence
risk which will be beneficial for the Boeing in terms of preventing the aircraft from terrorism.
G. Analysing the use of CAPM in terms of determining the cost of debts
To analyse the cost debts there will be use of CAPM method which will require the
returns over investments which must be as long as the systematic risk of the investment.
Therefore, it can be said that, to measure such component there is need to have implication of the
equity beta as to analyse the return over equity (Using CAPM to determine the cost of debt,
2012). Therefore, if the debt beta is not zero then capital assets pricing model will be used to
determine the cost of debt such as:
However, in this case there is no such components are available so it will not been
calculated for Boeing.
H. To analyse the length of project the estimation belongs to weighted average debt and long
terms debts
In order to meet the length of project there is need to have the proper analysis of WACC
which will be beneficial for the firm in having the adequate returns for the long period.
Therefore, while referring to the situation there are requirements to have acquiring a loan that
will be beneficial in terms of analysing the WACC. Thus, while measuring the cash flows of the
project there is only long term debts were considered by professionals which do not bring the
adequate return over the invested money (Sanusi and Dada, 2017). There is need to consider all
the short term as well as long terms investment that will be beneficial in terms of analysing the
adequate return to be obtained by firm at the period of maturity. However, it can be said that if
Boeing mention all the investments in to accounts than it will be fruitful for them to measure the
outcomes they will go to have the time of completion of project.
I. Determine the capital structure weights to be use
In the current situation of Boeing the capital structure is not balanced as they have the
debt for 36% while equity is of 64%. Therefore, it can be said that to balance these ratios there is
4

need to have proper execution in the business which will help the professionals to raise the debts.
The idle capital structure would be balanced as if the ratios of both the elements will reach to 50-
50%,. Thus, in these regards there is need to have proper operational planing in the organisation
which will help them in managing such ratios (Afrin and et.al., 2017). It will be beneficial for
them in enchaining the operational performance of the business as well as have the adequate
control over the debts of the entity.
QUESTION 3
A. Judgement relevant with WACC and the attractiveness of the project Boeing 7E7
In accordance with the measurement relevant with WACC there has been analysis made
over the ARR, payback and NPV value of the firm. Thus, in these regards it can be said that the
expected life of the project is 6 years which is comparatively lower than the project life for 25
years. In accordance with the annual cash flows of the project the ARR is being estimated as
30%. Therefore, it can be said that that ARR is appropriately measured as it indicates that this
project will be beneficial for Boeing in terms of having the profitable returns. These results are
being shown in the appendix of this project. In terms of identifying the NPV of the project which
represents the present value of the forecasted cash flow (Ong and et.al., 2017). Thus, the NPV is
18547.91 which is reflecting the positive balance as well as better than the initial investments.
Thus, it can be said that the project will be fruitful for the business in the long run and it must be
launched.
B. Economically attractiveness of the project under several conditions
In terms with the profitability of project 7E7 of Boeing, there has been various
circumstances which reflects the fruitfulness of this project. The cost of capital is appropriate as
it indicates that there will be less requirement of funds to meet the operations of business. The
project will have less capital expenditure so the firm do not ned to depend over the shareholders
or investors to make the adequate capital investments in the launch of 7E7. On the other side, the
payback period of the invested capital is to be expected at 6 years, ARR at 30% as well as NPV
as 18547.91. Therefore, it can be said that the project is being very profitable for the business as
it will not reflect any losses and it must be operated (Dutta and Nezlobin, 2017).
5

C. Sensitivity analysis in relation with the Boeing's gamble
To analyse the profitability of the project the sensitivity analysis will reflect the 3
different discounting factors of the operations. Therefore, in these regards the cost of capital and
equity to be considered for estimating the discounting factor at 3.39% of rate. Thus, the
measurements will belong to the cash flow of 25 years at the initial investments of 5015 which
reflect the NPV of 18547.91. It reflects the positive balance for the project as well as the
estimation reflects that this project will be beneficial and it will be helpful for the entity to have
fruitful gains for the long run. There has been changes in the discounting factor which is rated at
2% for the same 25 years the NPV has been measured as 28347.98. Thereafter, the NPV of
21775.26 will be measured at the discounting rate of 4% were measured. Therefore, it can be
said that, the project will be beneficial for the entity as the professionals in the firm make
adequate planning in terms of reducing the expenses or costs of operations (Creedy and
Gemmell, 2017). There has favourable outcomes on the said of each transactions and thus, it can
assume that the project will be profitable for the business as well as it will bring the fruitful
returns.
QUESTION 4
Valuable the project 7E7 for the board
The project 7E7 will be beneficial and profitable for Boeing as per the measurement has
been made over the cost of capital and costs of equity. Therefore, in accordance with the costs of
capital it if 3.39% which is current lower at 2.76% so it can be said that, comparatively the cost
of capital is lower and the business will be beneficial as if they are having the profitable returns
over their expenses In relation with the payback period it has been analysed that the firm will
become able to recover the amount of capital invested in the project which will be within 6 years.
It indicates that the project is profitable for entity as it helps in meeting the amount of
investments within less time. Thereafter, the cost of equity was measured at 1.15% which is also
favourable for the industrial operations. There is need to make increment in the debts of the firm
which will help them in having balance capital structure (Biørn, 2017). However, in accordance
with the ARR and NPV which also reflect the most favourable outcomes from this project. The
NPV has been measured with the help of using the different discounting factors such as 3.39%,
2% and 4% and all presents the positive results. Thus, it can e said that the managers in firm
6

must launch this project as it will be fruitful for them in the long run as well as it is facilitating
them the adequate results (Levi and Welch, 2017). Moreover, it will be suggested to the
professionals in the firm that they must have proper execution over the costs and expenses to be
made which will be fruitful for them in the long run as well as enhances the performance of
entity.
CONCLUSION
On the basis of this study it can be said that, the project 7E7 for Boeing will be fruitful as
it reselect the adequate balances as well as make the appropriate changes in the operations of the
business. However, it will be helpful for the business in terms of various analysis such as cost of
debt, equity and capitals. In accordance with the profitably of the projects the analysis has been
made at determining the payback period, ARR and NPV for the estimated 25 years. Thus, this all
factors reflects favourable outcomes and the project must be operated.
7

REFERENCES
Books and Journals
Afrin, H. and et.al., 2017. Profitability analysis and gender division of labour in duck rearing: a
case of Kishoreganj district in Bangladesh. Progressive Agriculture. 27(4). pp.482-489.
Biørn, E., 2017. Taxation, technology, and the user cost of capital (Vol. 182). Elsevier.
Borello, D. and et.al., 2017. Modeling and Experimental Study of a Small Scale Olive Pomace
Gasifier for Cogeneration: Energy and Profitability Analysis. Energies. 10(12). p.1930.
Creedy, J. and Gemmell, N., 2017. Taxation and the user cost of capital. Journal of Economic
Surveys. 31(1). pp.201-225.
Dutta, S. and Nezlobin, A., 2017. Information disclosure, firm growth, and the cost of capital.
Journal of Financial Economics. 123(2). pp.415-431.
Levi, Y. and Welch, I., 2017. Best Practice for Cost-of-Capital Estimates. Journal of Financial
and Quantitative Analysis. 52(2). pp.427-463.
López Prol, J. and Steininger, K. W., 2017. Photovoltaic self-consumption regulation in Spain:
Profitability analysis and alternative regulation schemes. Energy Policy. 108(C). pp.742-
754.
Olson, G. T. and Pagano, M. S., 2017. The Empirical Average Cost of Capital: A New Approach
to Estimating the Cost of Corporate Funds. Journal of Applied Corporate Finance. 29(3).
pp.101-110.
Ong, J. B. and et.al., 2017. Groupon and Groupon Now: Participating Firm’s Profitability
Analysis. Computational Economics, pp.1-16.
Sanusi, M. M. and Dada, O. D., 2017. PROFITABILITY ANALYSIS OF MARKETING
TOMATO IN ODEDA LOCAL GOVERNMENT AREA OF OGUN STATE, NIGERIA.
Ife Journal of Agriculture. 28(2). pp.91-101.
Online
Using CAPM to determine the cost of debt. 2012. [Online]. Available through
:<http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Cost%20of%20Debt.aspx>.
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APPENDIX
1. Payback period
Initial investment -5015
Cash flows
1 -324.171 -5339.17
2 681.1246 -4658.05
3 613.8829 -4044.16
4 847.8607 -3196.3
5 885.911 -2310.39
6 1118.779 -1191.61
7 1492.279 300.6666
8 1330.846 1631.512
9 2110.914 3742.426
10 2235.697 5978.123
11 2600.018 8578.141
12 1997.825 10575.97
13 1840.07 12416.04
14 1361.244 13777.28
15 1477.298 15254.58
16 1559.298 16813.88
17 1819.08 18632.96
18 2046.465 20679.42
19 1669.915 22349.34
20 1631.057 23980.39
21 1663.678 25644.07
22 1696.952 27341.02
23 1730.891 29071.91
24 1765.508 30837.42
25 1800.819 32638.24
2. ARR
9

Initial investment 5015
Cash flows
1 -324.171
2 681.1246
3 613.8829
4 847.8607
5 885.911
6 1118.779
7 1492.279
8 1330.846
9 2110.914
10 2235.697
11 2600.018
12 1997.825
13 1840.07
14 1361.244
15 1477.298
16 1559.298
17 1819.08
18 2046.465
19 1669.915
20 1631.057
21 1663.678
22 1696.952
23 1730.891
24 1765.508
25 1800.819
Total cash flow 37653.24
Average 1506.13
ARR 30.00%
3 NPV
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Initial investment -5015
Cash flows 3.39%
1 -324.171 0.967247 -313.553
2 681.1246 0.935567 637.2378
3 613.8829 0.904925 555.5179
4 847.8607 0.875286 742.1207
5 885.911 0.846618 750.0283
6 1118.779 0.818889 916.1559
7 1492.279 0.792068 1181.987
8 1330.846 0.766126 1019.595
9 2110.914 0.741033 1564.257
10 2235.697 0.716762 1602.463
11 2600.018 0.693286 1802.557
12 1997.825 0.670579 1339.7
13 1840.07 0.648616 1193.499
14 1361.244 0.627372 854.0066
15 1477.298 0.606824 896.4598
16 1559.298 0.586949 915.2277
17 1819.08 0.567724 1032.736
18 2046.465 0.54913 1123.775
19 1669.915 0.531144 886.9663
20 1631.057 0.513748 837.9522
21 1663.678 0.496921 826.7171
22 1696.952 0.480646 815.6326
23 1730.891 0.464903 804.6968
24 1765.508 0.449676 793.9076
25 1800.819 0.434948 783.263
Total 23562.91
NPV 18547.91
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