Comprehensive Capital Budgeting Project: Boeing Company Analysis

This finance project evaluates a capital investment proposal for the Boeing Company, applying key capital budgeting techniques. The project calculates the opportunity cost, determined to be $1283.45 million, considering the potential interest lost over 10 years. The payback period analysis reveals that the initial project cost of $2673 million would not be recovered within the 10-year timeframe, leading to a recommendation against the project. Furthermore, the net present value (NPV) calculation, with a negative result of -$2220.48 million, reinforces the recommendation to reject the project, as the projected incremental earnings are insufficient to offset the initial investment. The analysis uses data from the provided assignment brief and references academic sources to support the financial recommendations.

FINANCE
PROJECT RECOMMENDATIONS

In order to evaluate the feasibility of the project proposed, the opportunity cost, the
payback period and the net present value techniques have been used as follows.
Opportunity cost: Based on the amount of the total assets of the entity “Boeing
Company” the project cost has been computed to be 2% that amounts to $ 2673 million. The
opportunity cost has been computed to be $ 1283.45 million. This means if the project capital
expenditure has been incurred in cash today, the future value of the same amount in 10 years
would be around $ 3956 million. This means, the interest that could have been earned on such
a project while the cost of capita being 4 % for 10 years is amounted to be $ 1283.45 million.
Thus, in order to accept the above project proposal, the entity Boeing would have to let go of
the interest of $ 1283.45 million.
Payback Period: The Payback period or the cash payback period refers to the time
required by a project to recover the initial cost of the project through the estimated annual
cashflows (Brigham & Houston, 2012). Therefore in simople words, the payback period is
the point of time at which the = cash inflows become equivalen to the initial cash outflows of
the project. The formula is as follows:
Payback period = Cost of the project/ Annual cash inflows
Accordingly, the payback period of the project of the company Boeing has been
worked out to be beyond 10 years. This mean, the annual incremental earnings to the tune of
$ 80 million per year would not be sufficient to recover the initial project cost of $ 2673
million. Accordingly, it has been recommended not to accept the project proposal.
Net Present Value: The NPV is considered as the most significant investment
appraisal technique as it encompasses the concept of the time value of money (Baker &
English, 2011). The technique makes use of an appropriate discount rate and the future

financial cash inflows and outflows are discounted and compared with the initial cost of the
project. The NPV is determined using the following formula
NPV=∑
i=1
n CFi
(1+ d)i
= CF0 + CF1
(1+k )1 + CF2
(1+k )2 + …. + CF3
(1+k )3
Here:
CF0 = Initial project cost
CFi = Annual cash flows of project
k = cost of capital
n = periof of the project
In the case of the project proposal of the company Boeing, the present values of the
future incremental earnings of $ 80 million for 10 years has been computed to be $ 452.02.
This is against the initial cost of the project that is $ 2673 million. Therefore the NPV has
been computed to be – 2220.48. As the NPV is negative, it is recommended not to accept the
project. This means the stated levels of the incremental annual earnings for 10 years would
not be able to recover the initial project cost.

References
Baker, H. K., & English, P. (2011). Capital Budgeting Valuation: Financial Analysis for
Today's Investment Projects. New Jersey: John Wiley & Sons Inc.
Brigham, E. F., & Houston, J. F. (2012). Fundamentals of Financial Management. Boston
MA: Cengage Learning.