The Boeing 7e7

1250 Words Apr 5th, 2011 5 Pages
The Boeing 7E7

WACC Estimation
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:
R_EC= β_EC*(R_M-R_f )+R_f where REC is the cost of equity capital of the commercial aircraft division. βEC is the beta for the commercial division of Boeing. This beta is used instead of the company’s overall beta is because the 7E7 project is a project on the commercial aircraft section. It will help to improve the evaluation process when comparing the WACC with the IRR. Rm is the market rate of return in US and Rf is the risk-free rate.
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In addition, the downturn of business cycle and advance in video-conferencing technologies also affect the company estimation of future demand. It predicts that during the next 20 years, economies will grow annually by 3.2%, and air travel will grow with GDP at an annual rate of 5.1%. According to this long-term market outlook, it suggests that there will certain be a market for 7E7.
Market Share Airbus will launch their new large, long distance plane A380 in 2006. This plane can be a dreadful competitive product to Boeing. If Boeing falls behind regarding innovations, fuel efficiency and other attributes of a long haul airliner, it will soon lose its market share. In order for Boeing to compete in the aviation industry, it is crucial to take on some risk and develop this new 7E7 project. This helps the company to fight against its competitors and recover from the slump in the industry.
Financial Analysis The sensitivity analysis on IRR provided by the case in Exhibit 9 is demonstrated in Table 3 in Appendix. With reference to the calculated WACC, 11.22%, most of the circumstances considered in the sensitivity analysis suggest the acceptance of the 7E7 project. However, if the air travel demand worsened and sold only 1500 in the first 20 years, the project will be abandoned even if there is a 5% premium in price. If the unit volume sold is equal to

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