Abdul Alhomaid

Sho Kojima
Tony Thompson

Boeing 7E7 Project Analysis

Company History

The Boeing Company manufactures aircraft for the commercial and military markets. Boeing’s
primary competitor is Airbus a European company. Boeing normally leads Airbus in market
share, but in 2002 Airbus took the number one position.

Problem Statement

Boeing is facing several factors when it comes to revenue and market share. First, several
systematic risks such as the war in Iraq, spurts of global terrorism, and the SARS outbreak
reduced market demand for aircraft. Second, competition with Airbus has not gone Boeing’s
way as Airbus has taken the lead in market share. Third, due to changing customer perception
Boeing abandoned their “Sonic Cruiser” project after spending 2 years on development; this
makes Boeing long overdue for a project that will pull it out of its financial slump.

Analysis Results

The travel industry will continue to grow on the basis of strong demand in new customer bases
every year, and new customers thanks to globalization. This is going to increase the demand for
Boeing’s 7E7 Dreamliner, as airlines start to search for more fuel efficient planes. The new
design modifications are going to give Boeing a competitive advantage, as well as more
experience and history in meeting deadlines. Based on Exhibit A despite the optimistic view of
this project, a beta of 1.05 shows a higher than market risk in continuing this project. Breaking
the cost of capital into two sections, debt and equity, helps analyze observing the affect of any
future actions on the cost of capital. A 30 year Treasury bond rate of 4.56% used as a risk free
rate and an A- rating bond spread of 124 basis points gives a 4.684% Cost of Debt. Adding the
aforementioned risk free rate to the market risk premium of 5% times the given value line beta
gives a 9.81% Cost of Equity. Exhibit 10 states a market value Debt-Equity ratio of 52.2%,
Exhibit 2 shows a market value of equity $1,813 Billion. This leads to a Cost of Capital of
8.05% which is a lot lower than the projected Internal Rate of Return 15.7%.

Recommendations

The projected IIR of Boeing’s 7E7 project is 15.7% and the cost of capital is estimated at 8.05%.
Since the return exceeds the cost, and Boeings need for a product to compete with Airbus is
significant; this project should be brought to fruition.