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The Boeing 7e7 Case Study

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The Boeing 7e7 Case Study

Robby Multani, Akash Nawal, Romit Babbar, Anshul Rajgarhia, Pratik Deshmukh, Prikshit Ravesh

What is an appropriate required rate of return to use in the capital budgeting decision?

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Under what circumstances is this project economically attractive?

The given IRR is 15.7%, meaning that the rate of return should be of equal value in order to have a NPV value greater than zero. The goal of this project should be to have a NPV greater than zero, meaning that the project should be taken.

How comfortable are you with the cash-flows prepared by Boeing? Are there aspects you find troublesome and do they materially affect the decision?

The cash flows that was prepared by Boeing are considered to be too optimistic because:

  • Boeing expects to sell 2500 planes in the first 20 years
  • Airbus would be unable to match the efficiencies of Boeing, which as a result, would be able to deliver all the plane specifications
  • The customers is willing to pay a 5% price premium for lower operating costs.
  • The IRR was assumed to be 15.7%, but the IRR was very sensitive with the number of the planes that would be sold in the first 20 years. For example, if Boeing sold 1500 planes in the first 20 years, then the IRR would drop down to 10.9%.

Next, the forecast Boeing had developed assumed that the development costs were $8 Billion. The range determined by the company for the development costs was $4 Billion, which is huge because that big of a range could affect the IRR dramatically. FInally, there is abundance of volatility in the assumptions and the FCF are very sensitive to Boeing’s assumptions. As a result of the assumptions Boeing is making, without enough confidence, Boeing should assume, with the ranges in assumptions provided, that this case would not be the best case scenario.

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