The hurdle rate, or the internal rate of return that gives the project an NPV of zero is The case gives us the rates of the 3-month Treasury Bill and the 30 year Treasury Bond at 0. Should the board approve the 7E7? As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. The weighted average cost of capital WACC was calculated to be You can add this document to your saved list Sign in Available only to authorized users. Your e-mail Input it if you want to receive answer.
Which equity market risk premium EMRP did you use? This is the estimate used by Brealey and Meyers, and is comprised of total market returns from This will add to the inherent risk of the project if any of these contractors fail to deliver on time. As you will find, the financial calculations provided in this report show that the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing.
The Boeing 7E7
What Beta did you use and how did you derive it? After carefully considering the risks and benefits of the 7E7project, we recommend that the Board of Directors approve the project.
This data is highly skewed due to the events of September 11, and the subsequent deterioration of the airline industry. With a beta of 2.
We used the rate of 5. The new 7E7 will have lower operating costs due to increased cargo space and increased fuel economy due to new engine design, would also be versatile and suitable for both short and long flight routes.
Management Summary The analysis identifies both risks and benefits associated with undertaking the 7E7 project. This is therefore the risk free rate that we will use for our calculations.
For example, we used a market expectation of Which capital-structure weights did you use? There is an awful lot of good work in the construction of this document: For example, a rate of 3.
In order for Boeing to compete in the aviation industry, they must take on some risk and develop this new plane. The success of the expandable wing will also give the plane attractive versatility.
There are several factors to these lower numbers. See the detailed comments that I have made in the RHS margin.
Boeing 7E7 case study by Aaron Casey on Prezi
No other weighted entities such as preferred shares are considered. Therefore the equity market risk premium is equal to 7.
It did not quite all come together perfectly at the end.
The 7E7 is the first plane to use a carbon body construction and employ wingtip extenders. And lastly, the weak economy has vacationers thinking of local destinations instead of traveling abroad. There are other risks mentioned stuey that must be considered but on balance the reasons to go forward with the project outweigh those against it.
That ups our costs to Boeing showcases diversity initiatives at World Bank meeting. They will be coming to market with their new A in In this case, the extended length of the regression period is a detriment to cawe calculation of future risk. The equity market risk premium should equal the excess return expected by investors on the market portfolio.
Solultion to Case Study Cost of Capital Upload document Create flashcards. Ensuring the development and manufacturing costs are kept cxse by employing decades of engineering expertise and already proven technologies and solutions, it is recommended that Boeing undertakes the 7E7 project.
Boeing xtudy Project Evaluation Circumstances for an economically attractive project The project would be economically attractive if Boeing could sell enough planes in a given time period above a certain price.
As expected, the WACC for the commercial division is much higher due to the riskier aspect of this investment that impacts the cost of equity capital. This will help command a larger share of the market.
The 21 month beta 77 began September 17, Since this project has a time horizon on the order of years it would be very reasonable to use the year Treasury Bond as the value for the risk free interest rate.