Case Study of Boeing's Decision to Develop the 777 1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 777? 1a. which beta did you use? Why? 1b. if you used the CAPM, which risk premium and risk free rate did you use? Why? 1c. which capital-structure weights did you use? Why? Answer: i. Key Assumptions for the Calculation: In order to calculate the appropriate rate of return against which to evaluate the prospective cash flows from the Boeing 777 project, several assumptions had to be made. First, in order to facilitate the calculations, I referred to betas from Exhibit 9 and selected the value for Boeing calculated in comparison to the S&P 500 Index for the …show more content…
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This paper consists of several sections. The description of the project outlines the capital asset decision at hand, which in this case is the purchase of a new Boeing 787-9 Dreamliner by American Airlines. The second section of the paper highlights some of the information about the Dreamliner. Statistics about seat configuration are critical to the revenue projects used later in the net present value (NPV) calculation. The third section of the paper covers the lease or buy decision. American has both options and this section covers some of the financial aspects of each that are critical, such as depreciation. The fourth section is an explanation of the weighted-average cost of capital for American Airlines. The fifth section is an outline of the NPV calculation. The final section is the conclusion. The NPV compares directly the incremental cash flows associated with the lease option and those associated with the buy option. The final NPV figures are close to one another, but one option clearly adds more value to the company to the other. The "buy" option is therefore recommended.
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
Most of the corporations calculate WACC for giving investors an estimate on profitability and for being able to weight future projects. We are presented with Boeing current bonds, which constitute the long term debt portion of capital, and with Boeing’s assets which constitute the equity portion of capital. No other weighted entities (such as preferred shares) are considered. The debt/equity ratio would help with the calculation of weights. Boeing would need to earn at least 15.443% return on its investments (including the 7E7 project) in order to maintain the actual share price.
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5).
In order to evaluate the prospective IRRs from the Boeing 7E7, we first try to estimate an appropriate required rate of return for accepting this project. The capital asset pricing model is applied to estimate the cost of equity of the commercial aircraft division:
There were also some unknown variables that needed to be taken into account. Development and per-copy costs were the costs that the board wanted to minimize. The forecast assumes that development costs would be $8 billion. There was great uncertainty surrounding the manufacturing cost of the 7E7. The element that adds the most uncertainty to the manufacturing costs are in the engineering of the aircraft. While the engineering costs could be high, Boeing was hoping that the lower construction costs of using the composite materials would compensate for the elevated engineering costs.
The Boeing Airplane Company was established in 1916 by William Boeing in the city of Seattle, Washington. Boeing has become one of the world’s biggest manufacturers when it comes to military and commercial planes and parts. There are two major corporations within the aircraft industry that are big competitors and share a great rivalry with each other and they are the Boeing and Airbus Corporations. The corporations have been competing with each other for many years when it comes to finding potential contracts for their airplane and also creating different and unique aircraft models for their targeted customers.
A key factor in determining a project's viability is its cost of capital [WACC]. The estimation of Boeing's WACC must be consistent with the overall valuation approach and the definition of cash flows to be discounted. Note that this process is a forward looking focus and is laden with uncertainty. It is how the assumptions are modeled that many costly mistakes can be made. While finding a rate of return for an individual project, it is important to remember that WACC is only appropriate for an individual project.
For the financial analysis project, the companies I choose to work with are the Boeing Company (ticker symbol: BA), and Lockheed Martin (ticker symbol: LMT). Both companies belong to the Aerospace industry and maintains a healthy competition among them. In order to compare the financial situations of both companies, the data from most recent years, 2014 and 2015 were used. During this analysis, I intend to compare the current financial positions of both companies in their respective industry.
Boeing Australia Limited (BAL) was formed in 1996 it was a global extension of the US firm, The Boeing Company. BAL developed many great capabilities in the areas of space communications, military aircraft and equipment, and such. However as it grew, BAL was faced with difficult decisions in finding ways to upgrade its procurement systems and processes to improve its operations. In 1999, BAL recruited Russell Menere as the new national procurement manager to help find ways that would improve procurement processes by one of two ways, cost savings or reducing processing times. Russell began doing a number of short term improvements here and there to get started, four key things he did were 1) rationalization a large number of
Before take the decision whether or not invest money in a company it is imperative to analyze the overall situation of the company. Boeing was selected for study because, as representing American big business at the millennium, the company was reputable an unsullied by financial scandals. Boeing is engaged in the design, development, manufacturing, sale and support of the commercial jetliners, military aircraft, satellites, missile defense systems and services. Boeing is situated in the 36th position out to the fortune 500 which is very suitable however as the economy is changing it is imperative to perform a SWOT analysis in deep in order to know the company
2Could e-Enabling create the kind of sustainable advantage that the airplanes used to provide?Boeing was able to utilize its competitive advantage to produce better airplanes at a better price compared to its closest competition. Boeing dominated the market industry and became a global leader by producing cutting edge products that were better quality than the closest competitor. It wasn’t until Airbus started receiving government assistance from European countries that another