Financial Analysis of Boeing's 7E7 Project: A Decision-Making Report

This report provides a comprehensive financial analysis of Boeing's 7E7 project, focusing on international finance and decision-making. It evaluates the project's viability by examining key financial metrics such as Weighted Average Cost of Capital (WACC), the applicability of the Capital Asset Pricing Model (CAPM), cost of equity and debt, and the use of risk-free rates and risk premiums. The report critiques the use of CAPM, discusses debt and its relation to commercial risk, and analyzes the project's economics, including sensitivity analysis, Average Rate of Return (ARR), and Net Present Value (NPV). It also explores capital structure weights and the implications of various financial decisions, ultimately assessing the project's potential for value creation. The report concludes with an evaluation of the project's economic viability and provides recommendations based on the financial analysis.

International Finance &
Decision Making

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Question 1........................................................................................................................................1
Boeing contemplating to launch the project named 7E7........................................................1
Question 2........................................................................................................................................2
A. Appropriate required rate of return against IRR from Boeing 7E7...................................2
B and G. Appropriate reason for not using CAPM model for estimating cost of capital......2
C. Usage of CAPM to estimate cost of equity and reason for using specific beta and risk-free
rate of return...........................................................................................................................3
D. Usage of risk free rate and risk premium..........................................................................3
E. Cost of debt of company....................................................................................................4
F. Explain debt and its relation to commercial risk................................................................4
H. What is appropriate to calculate whether weighted average of all debt or a weighted
average of long-term debt with maturities that match the length of the project.....................4
I. Critically discussed use of capital structure weights ..........................................................5
Question 3........................................................................................................................................5
A. Evaluating the project of company....................................................................................5
B. Outline circumstances why the project is economically viable.........................................6
C. Sensitivity analysis of the project......................................................................................6
Question 4........................................................................................................................................7
Successful approval of project and value creation for Boeing organisation..........................7
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX....................................................................................................................................10

INTRODUCTION
Project evaluation is essential aspect for the company as investment should be made in
profitable project so that profits may be achieved by it. The enclosed report deals with Boeing
company which is operating in airline industry. It is planning to launch a new project named as
7E7. For this, it has to rely on investment appraisal techniques which will provide effective
results whether to invest in the project or not. Organisation need to take better decision for
evaluating the credibility and viability of the project so that it may earn better profits with much
ease. This will provide with desired results and customers' will be satisfied in the best possible
way.
Question 1
Boeing contemplating to launch the project named 7E7
Boeing organisation contemplates to launch the project so that it may be able to garner
more profits which had deteriorated in the past. The project requires effective and better
decision-making as wrong decisions may be hazardous to company and it will lose the market
share. The aircraft industry in which Boeing operates is highly competitive as Airbus is the chief
rival to it. As such, better decisions should be made so that 7E7 project may be successfully
attained with much ease (Avdjiev, McCauley and Shin, 2016). The new project named as 7E7 is
made clearer by Boeing that it will be able to travel much faster than supersonic air planes that
were implemented and created in the past.
Now coming to today's scenario, it is not good time for company to launch this project as
terrorism is at its peak and people are afraid about it. In addition to this, several countries are
facing economic recession and due to this, customers' prefer to travel in economic class. As a
result, it is not the best time to launch the project by organisation as estimated profits will not be
generated significantly (UK Aviation market).
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Question 2
A. Appropriate required rate of return against IRR from Boeing 7E7
WACC (Weighted Average Cost of Capital) is a method which is useful for the company.
It is the rate that organisation is expected to pay on an average to all holders of shares or any
other securities. Current WACC is 2.76% which is very low and it may be conveyed that Boeing
has effective control on WACC. The calculation of WACC is simple and it is computed by cost
of equity and cost of debt and then consecutively weights are calculated to find out WACC. The
weights so calculated are then multiplied to cost of sources of finance which are mentioned
above in the table. From this, cost of debt corporate tax is deducted and in then finally weighted
average cost of capital is computed (McKenzie and et.al, 2014). This method is helpful as
present value of cash flows are computed from it and is useful method for market analysts as
well.
B and G. Appropriate reason for not using CAPM model for estimating cost of capital
CAPM model is not suitable as it does not use cost of capital as in it calculates only items
which are related to cost related to equity. In simple words, this model ignores cost of debt which
is vital for correct computation (Biswas, 2015). As a result, it is justified that CAPM model is not
reliable as cost of debt is not used. In contrary to this, weighted average cost of capital should be
used by the company as it calculates weight cost of debt and equity and then corporate tax is
deducted from the same to generate desired results. As a result, CAPM model is not effective
method to calculate cost of capital.
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C. Usage of CAPM to estimate cost of equity and reason for using specific beta and risk-free rate
of return
From the above table of cost of equity, it may be said that CAPM model is essential
method that is used by company for computing cost of equity (Papadopoulos and Heslop, 2014).
It may be interpreted from the above table that cost of equity is 3 % which is low and it may be
said that company has low cost of equity. Risk free rate of 0.85 % is applied as cost of equity is
not estimated for a longer period and consecutively rate of long term bond is not suitable for
Boeing company and it is justified that it is not much worth to the company.
Furthermore, coming to beta which is taken as 60 days. It is taken at these days as stocks
changes rapidly and are liable to change and moreover, volatile in nature. As a result, beta for
more than 60 trading are not taken into account.
D. Usage of risk free rate and risk premium
The risk-free rate is taken as 1.85 % and some concrete reasons are behind it. From the
above computed table of cost of equity, it may be conveyed that risk-free rate is taken for a
shorter period. This is the reason to use CAPM model for estimating cost of capital for effective
analysis in the best possible way (Vishny and Zingales, 2017). Furthermore, risk premium
applied is 1.15 %. This is calculated by deducting risk-free rate of return from that of market
return by the company.
The market rate of return is estimated at 2 % as market conditions are not appropriate
because of the economic recession prevailing in the market. This is the reason behind using
lower market rate of return. By computing risk free rate of return from that of market return, it
may be analysed that there is not much difference between the both aspect.
E. Cost of debt of company
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Cost of debt is important concept for Boeing company as it has to pay interest on
borrowings taken from creditors. From the table, cost of debt after tax is calculated. It may be
showed that cost of debt is 7.59 %. The computation is done by taking average of coupon
payments which is obtained in return on the bond (Oztaysi, Onar and Kahraman, 2017). Then
afterwards, tax rate is applied to calculate cost of debt after tax by the company with much ease.
In simple words, cost of debt is calculated and the remaining percentage part of 35 % is not taken
and consecutively cost of debt after tax is computed appropriately.
Furthermore, it may be said that cost of debt and after tax is calculated by following
systematic and logical approach and consecutively, rate is calculated much ease.
F. Explain debt and its relation to commercial risk
Debt should be taken by the management in adequate amount else, commercial risk is
prevails if company is not able to repay it with much ease. Debt risk is also called as credit risk
as organisation takes debt from them. If organisation is unable to pay debt within stipulated time
then, risk arises up to great extent. In relevance to this, firm should use adequate mix of debt and
equity so that commercial risk is minimised up too much extent and control may be initiated with
much ease.
Proper risk management system is the essence to effectively cope up with the debt and
time to time monitoring should be done so that commercial risk may not be hiked. Proper steps
should be taken by the company (Gitman, Juchau and Flanagan, 2015).
H. What is appropriate to calculate whether weighted average of all debt or a weighted average
of long-term debt with maturities that match the length of the project
The current situation signifies that in order to calculate weighted average cost of capital,
long term debt with maturities must be taken. This is the reliable method in current situation to
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compute for cost of capital with much ease by taking weighted average of long- term debt with
maturities.
This fact is observed long term loan amount is taken into account while making certain
projections about cash flows (Zhang and et.al, 2014). This is the main reason for taking long-
term maturities and short-term loan amount is dropped significantly by the company. But the
long term as well as short-term or both depends upon the requirement of company. As a result,
Boeing company can use effective option to make appropriate decisions. This will provide with
better and effective results in the most proficient way.
I. Critically discussed use of capital structure weights
The capital structure weights are important to company so that it may analyse and assume
that capital comes from either debt or equity and is a simple method for calculating total capital
on an weighted average with much ease. The capital structure used by the company is 36% and
64% respectively. The ratio may also be interpreted as 36 : 64 which implies that 36 % is debt
and 64 % is equity. This is not good situation as Boeing organisation has more proportion of
equity which is not suitable for it.
The company should have a perfect mix of both of debt and equity so that it may be able
to utilise both sources of finance with much ease in the best possible way. Moreover, if equity
ratio is increased in near future, then shareholders' will have less control on organisation and it
will affect firm's performance negatively. As a result, more debt should be taken to make perfect
balance between debt and equity (Davidson and et.al, 2015).
Question 3
A. Evaluating the project of company
The project may be evaluated that it may be able to cover the cost in forthcoming 6 years
which is made clearer by looking at the provided appendix. This is low as project full life is 25
years and by analysing this, cost of the new project 7E7 will be covered in short duration. For
project evaluation, ARR (Average Rate of Return) is another method which can be used by the
organisation.
ARR calculation conveys that 7E7 is profitable for Boeing as it is 30 % which is regarded
as good percentage for profitability purpose on the investment. Next method provided in the
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appendix is NPV which shows net present value of the 7E7 project and it is 18547.91 value
reflected from the table. Higher NPV, better for the company as returns are higher. It may be
evaluated that investment return on the new project will be higher and as a result, it is profitable
for the organisation.
B. Outline circumstances why the project is economically viable
There are various circumstances which shows that the project is economically profitable
and viable for the company (Graham and et.al, 2017). The low cost of capital is taken and this
implies that cost of project will be reduced leading more profits. Thus, it is profitable for Boeing.
It should also may not raise fund through equity because it already has more equity and further
will increase dividend rate as well which will be provided to shareholders'.
Reducing cost of the project is another circumstance which may be profitable for the firm
as cutting down the cost will make ensure that firm will achieve more of the profits in the most
productive way. This is possible when operating cost is reduced, that will have impact on the
cash flow as it will increase eventually and firm will be profitable. Furthermore, if more orders
are received for manufacturing, then also cash flow will positively increase and as a result, these
all circumstances are profitable for the company and 7E7 project is economically viable.
C. Sensitivity analysis of the project
The sensitivity analysis may be carried out that cost of capital is 3.39 %, NPV of 7E7
project is 18547.91 and if this rate is changed to 2 %, then revised NPV may be 28347.
Similarly, discounting rate is also changed to 4 %, NPV will be 21775. Therefore, it may be
analysed that more the cost of capital is decreased, more NPV is increased and as a result, more
profit may be earned by the company concerning on low cost of capital (Borio, James and Shin,
2014). In the same way, COGS(Cost Of Goods Sold) to sales is also decreased to 70 %, in this
case NPV will be 43070.
By analysing this, it may be said that COGS are one of the factor that influence
profitability for the firm. This is because it affects cash flows of the business. As a result, firm
should be able to control expenditures by taking necessary steps. This can be done by purchasing
raw materials at low price from suppliers.
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Question 4
Successful approval of project and value creation for Boeing organisation
The 7E7 project is approved by taking evidences from various investment appraisal
techniques. This can be shown by payback period which is good and project will cover the cost
in less time. Another technique used is ARR is also effective and adequate amount will be earned
by Boeing by investing in it (Joo and Durri 2015). Even more, NPV is also higher. These
techniques reveal that 7E7 aircraft project will be successful for the company.
Value creation will be made by the company. This may be achieved as travellers are
demanding for faster routes so that they may reach destination in less time with such supersonic
planes. Moreover, it will also benefit stakeholders of the company. Customers' will also be
benefited and satisfied and in turn, company will be benefited by earning revenue. Hence, it can
be said that 7E7 project will create value for Boeing to achieve objectives by garnering profits
with much ease.
CONCLUSION
Hereby it may be concluded that project evaluation is vital for the firm as wrong
decisions may ruin entire profits of the company. The methods stated while evaluating project to
check the viability of it are of much importance as they provide concrete conclusions to company
whether to invest in a particular project or not. By using these techniques, better and effective
decisions may be taken with much ease. Moreover, appropriate discount rate should be taken by
the company as wrong discount rate will provide false evaluation. As such, discount rate must be
taken appropriately in the best possible way.
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REFERENCES
Books and Journals
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.
McKenzie, E. and et.al, 2014. Understanding the use of ecosystem service knowledge in decision
making: lessons from international experiences of spatial planning.Environment and Planning C:
Government and Policy. 32(2). pp.320-340.
Papadopoulos, N. and Heslop, L. A., 2014. Product-country images: Impact and role in
international marketing. Routledge.
Vishny, R. and Zingales, L., 2017. Corporate Finance. Journal of Political Economy. 125(6).
pp.1805-1812.
Oztaysi, B., Onar, S. C. and Kahraman, C., 2017. SELECTION AMONG INNOVATIVE
PROJECT PROPOSALS USING A HESITANT FUZZY MULTIPLE CRITERIA DECISION
MAKING METHOD. Journal of Economics Finance and Accounting. 4(2). pp.194-202.
Gitman, L. J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson
Higher Education AU.
Zhang, K. Z. and et.al, 2014. Examining the influence of online reviews on consumers' decision-
making: A heuristic–systematic model. Decision Support Systems. 67. pp.78-89.
Davidson, G. and et.al,, 2015. Supported decision making: a review of the international
literature. International journal of law and psychiatry. 38. pp.61-67.
Graham, J. R. and et.al,, 2017. Tax rates and corporate decision-making. The Review of
Financial Studies. 30(9). pp.3128-3175.
Borio, C. E., James, H. and Shin, H. S., 2014. The international monetary and financial system: a
capital account historical perspective.
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Joo, B. A. and Durri, K., 2015. COMPREHENSIVE REVIEW OF LITERATURE ON
BEHAVIOURAL FINANCE. Indian Journal of Commerce and Management Studies. 6(2). p.11.
Biswas, R., 2015. Reshaping the financial architecture for development finance: the new
development banks.
Online
UK Aviation market, 2017. [Online]. Available through:< https://www.caa.co.uk/Data-and-
analysis/UK-aviation-market/>.
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APPENDIX
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
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ARR:
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%
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NPV:
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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