Add this document to saved. The equity market risk premium should equal the excess return expected by investors on the market portfolio. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7? The weighted average cost of capital WACC was calculated to be The 7E7 project would need to provide returns of The market competition corroborated with the unfavorable economic conditions prompt a swift and decisive answer from Boeing.
The 7E7 will carry more passengers per flight in a fuel efficient manner allowing the airline companies to justify purchasing the plane. 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. 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. Sensitivity Analysis The following is the sensitivity analysis of the Boeing project which gives optimistic and pessimistic estimates for the underlying variables of volume and cost of sales. Boeing 7E7 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. The 7E7 is the first plane to use a carbon body construction and employ wingtip extenders. Which risk-free rate did you use?
A decrease in business travel has occurred due to cost and the advance of conferencing technologies. Assuming the development costs are correctly estimated and the market response is properly gauged, the reasons to answrs forward with the project outweigh those against it. In order for Boeing to compete in the aviation industry, they must take on some risk and develop this new plane.
This will help command a larger share of the market. Both ended June 16, The 7E7 answeers would need to provide returns of You can add this document to your acse list Sign in Available only to authorized users. Sensitivity Analysis The following is the sensitivity analysis of the Boeing project which gives optimistic and pessimistic estimates for the underlying variables of volume and cost of sales.
Ensuring the development and manufacturing costs are kept down by employing decades of engineering expertise and already proven technologies and solutions, it is recommended that Boeing undertakes the 7E7 project.
Boeing 7E7 case study by Aaron Casey on Prezi
This data is highly skewed due to the events of September 11, and the subsequent deterioration of the airline industry. This is the estimate used by Brealey and Meyers, and is comprised of total market returns from The hurdle rate, or the internal rate of return that gives the project an NPV of zero is casr With the economy so volatile, airlines will be looking for options that reduce their operating costs.
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. Boeing would need to earn at Boeing 7E7 Page 3 least This will add risk to the project since they have never been used on such a large scale project.
The Equity beta for the whole company and for the commercial division is calculated in the appendix. The equity market risk premium should equal the excess return expected by investors on the market portfolio.
The Boeing 7E7
Management Summary The analysis boieng both risks and benefits associated with undertaking the 7E7 project. Which equity market risk premium EMRP did you use? Boeing showcases diversity initiatives at World Bank meeting.
Should the board approve the 7E7? This will add to the inherent risk of the project if any of these contractors fail to deliver on time. A beta of 2 instead of 2. To achieve this Boeing would have to sell at least airliners in a year period. Which risk-free rate did you use? This plane will be a formidable competitor to the 7E7. Boeing is expecting to reach this unit stucy The financial calculations provided in this report show that snswers is a very good chance that the project will increase the wealth of the shareholders.
Instead of the What Beta did you use and how did you derive it?
That ups our costs to See the detailed comments that I have made in the RHS margin. The 21 month beta period began September 17, In this case, the extended length of the regression period is a detriment to the calculation of future risk.
As you will find, the dtudy 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.