There are other risks mentioned above that must be considered but on balance the reasons to go forward with the project outweigh those against it. If Boeing falls behind regarding innovation, fuel efficiency and all the other attributes of a long haul airliner they will lose their market share. In this case, the extended length of the regression period is a detriment to the calculation of future risk. Management Summary The analysis identifies both risks and benefits associated with undertaking the 7E7 project. Instead of the
Which risk-free rate did you use? We used the rate of 5. 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. With the economy so volatile, airlines will be looking for options that reduce their operating costs. 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.
This data is highly skewed due to the events of September 11, and the subsequent deterioration of the airline industry.
This plane will be a formidable competitor to the 7E7. The 7E7 project would need to provide returns stuyd Airbus is a close competitor.
We have decided to use the Year Treasury Bond as the risk free return because it most closely mimics the time horizon of the 7E7 project. The supply chain is very large and spread over the globe. Due to the length of the Boeing project, at first glance it would appear a beta calculated using a longer regression period would estimate future returns best.
If Ansers falls behind regarding innovation, fuel efficiency and all the other attributes of a long haul airliner they will lose their market share. The expected rate of return of a market portfolio of stocks is estimated at In this case it was calculated to be 7. Upload document Create flashcards. Giving a calculated WAAC of The equity market risk premium should equal the excess return expected by investors on the market portfolio.
After carefully considering the risks and benefits of the 7E7project, we recommend that the Board of Directors approve the project.
Add this document answfrs saved. The success of the expandable wing will also give the plane attractive versatility. 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.
Boeing 7E7 case study by Aaron Casey on Prezi
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 cawe both short and long flight routes.
If the market expectations underperform, we can also lower our estimates of Boeing 7E7 Page 5 cost of capital. And lastly, the weak economy has vacationers thinking of local destinations instead of traveling abroad.
Boeing had to determine what the decide what the underlying variables were which in this case happen to be development costs and the per-copy costs to build the 7E7. Add to collection s Add to saved.
The Boeing 7E7
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. Please use the capital asset pricing model to estimate the cost of equity.
Under what circumstances is the project economically attractive? What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? As you will find, the financial calculations provided in this report show caee the project will increase the wealth of the shareholders, also identifying the associated risks and how those could be minimized. Cost of Equity The 7E7 Project is a risky project.
With the economy so volatile, airlines will be looking for options that reduce their operating costs. Boeing 7E7 Project Evaluation Circumstances for an economically attractive project The project stud be economically attractive if Boeing could sell enough planes in a given time period above a certain price.
The Equity beta for the whole company and for the commercial division 7r7 calculated in the appendix. This will help command a larger share of the market. See the detailed comments that I have made in the RHS margin. The case gives us the rates of the 3-month Treasury Bill and the 30 year Treasury Bond at 0.
To achieve this Boeing would have to sell at least airliners in a year period. Aanswers example, we used a market expectation of Both ended June 16,