The Boeing 7E7
To develop or not to develop? that is the question

Executive MBA in Business & IT
Class of 2014
Module 5 – Risk & Finance - Assignment

Author: Luís Faria
Reviewer: Prof. Dr. Christoph Kaserer

The Boeing 7E7
Subject
Page

Module 5 – Risk & Finance - Assignment
2/15

Abstract
With Airbus surpassing Boeing's commercial aircraft market share, and revenues falling since the terrorist attacks on September 11, the key question in this assignment is whether Boeing should proceed with developing the 7E7 to stimulate revenue growth and market response.
Central to any decision is an assessment of the economic profitability of the 7E7 project at the given circumstances. However, taking into account the …show more content…
A complete valuation of the 7E7 project is presented on the second part of the document. It starts with an estimation of the weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment. As Boeing’s overall cost of capital is a mixture of different costs of capital, one for each division, the project WACC is adjusted to reflect the divisions’s risk. As the cost of equity is derived from the capital asset pricing model (CAPM) the uncertainties in this calculation are explained in detail. Given the estimated project
WACC, the document reflects on the financial attractiveness of the project at the given circumstances. Furthermore the document presents a calculation of the net present value
(NPV) created by this project.
On the third part we examine the sensitivity of the variables underlying the computation of the IRR and NPV. A description of the circumstances that would make this project financially attractive is given.
Finally it ends with a recommendation whether Boeing should proceed with developing the
7E7 taking into account all considerations and risks.

The Boeing 7E7
Subject
Page

Module 5 – Risk & Finance - Assignment
4/15

2
2.1

Strategic Background
Two competitors for one market

In 2002, two companies dominated the large plane (100+ seats) commercial aircraft industry: Boeing and Airbus. While Boeing had historically held the lead