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[Solved] Boeing 7E7 Case Study Solution: WACC Calculations and Answers to 7 Questions

Boeing 7E7 Case Study Solution, 7E7 Case Study, Boeing WACC Calculation
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Boeing 7E7 Case Study Solution

The Boeing 7E7 Case Study is a case study from HBR. The Case be analyzed from the perspective of new product introduction, financial estimations for Weighted Average cost of accounting (WACC), IRR (internal rates of Return), and NPV (Net Present Value). The case presents an opportunity to undertake a financial analysis and project viability document for New Product Introduction.

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Boeing 7E7 Case Study: Introduction

In 2003, Boeing announced their intention to create a new “super-efficient” commercial jet codenamed “7E7” or “Dreamliner.” Similar to when it first developed the 747 and 777, Boeing effectively “bet the farm” on this venture. The new airframe is technologically superior, and it will be sold in a rapidly expanding market, so the project should be greenlit. However, the demand for commercial planes dropped as a result of global travel warnings issued in response to the spread of the highly contagious SARS virus.

The board of directors at Boeing would have to consider all of these factors before giving the project final approval. The Critical task is to determine how the 7E7 project stacks up against a financial benchmark, such as the rate of return sought by potential backers. Internal rates of return (IRR) for the 7E7 project are displayed in the case, both for the baseline scenario and for alternative scenarios. The value of these internal rates of return (IRRs) is determined by students’ estimates of Boeing’s commercial-aircraft business segment’s weighted-average cost of capital (WACC). Students will be able to differentiate between qualitative risks that Boeing is taking and identify “key value drivers” after completing this analysis.

Learning how to calculate the weighted average cost of capital and the cost of equity is the primary focus of this case. The ability to compare beta estimates and use the levered-beta formulas is essential for students attempting to calculate the WACC of a segment. Boeing faces competition in both the civilian and military aircraft markets. The commercial aircraft division of Boeing’s overall corporate WACC must be isolated to determine an appropriate benchmark WACC for the 7E7 project. In this way, the concept of adding value to something is introduced to the students.

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Boeing 7E7 Case Study Solution: Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?

As a result of the available technology, Boeing is considering beginning the 7E7 project. Boeing’s main rivals claimed that the 7E7 was an engineer’s nightmare but a salesperson’s paradise. Carbon-reinforced materials, which are stronger than regular aluminum, will be used extensively in the construction of this project, making it the first commercial aircraft of its kind.

However, the threat of rivalry must also be considered. When a brand-new airplane hits the market, it’s bound to sell like hotcakes at first, but competitors taking the plunge to try to replicate 7E7’s success would be foolish. Both Boeing’s asking price and the number of 7E7 planes it could sell were constrained by the lack of information about the plane’s specifications and the threat of competition.

Although Boeing must take chances to maintain its standing in the aircraft industry, now is not the time to launch its project 7E7, in my opinion.

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Boeing 7E7 Case Study Solution: Should Boeing’s Board approve the 7E7?

Board members at Boeing should vote to green-light the 7E7 so that the company can continue to compete with Airbus and regain market share in the commercial aircraft sector. There is a scope for undertaking a financial analysis in the Boeing 7E& Case Study, which we will see later.

Boeing 7E7 Case Study Solution: How would we know if the 7E7 project will create value?

In capital budgeting, NPV is used to evaluate a project’s or investment’s profitability. It does this by looking at the future value of a dollar and comparing it to its value right now. According to the case and Boeing’s Market Outlook, NPV is a short-term metric, making Project 7E7 unfavorable. The negative cash flows are another reason why this project should be rejected.

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Examine the details of how to estimate the WACC :

WACC = (Wdebt)(rd)(1-tc) + (Wequity)(re)

  • Wdebt = proportion of debt in a market- value capital structure
  • rd = pretax cost of debt capital
  • tc = marginal effective corporate tax rate
  • Wequity = proportion of equity in a market-value capital structure
  • re = cost of equity capital
  • From Exhibit 10 : Debt / Equity ratio= 0.525

Tc = 0.35 (From page 237)

Rf = 0.85%

  • From Exhibit 2, Wdebt = 44646 / 129686 = 0.344

Wequity = 85040/129686 = 0.656

  • From Exhibit 11, Rd is calculated as below which is 5.335%

The cost of equity capital (re ) will be calculated using CAPM. re = Rf + β*E(Rm)

  • Rf [Risk free rate + Equity Beta * (Expected return on market – Risk free rate)] Risk premium=8.4%. Since Boeing has two business components (defense and commercial), Β Boeing= βcommercial*Wcommercial + βdefense* Wdefense We use the information given in Exhibit 10 to calculate Beta Equity.

BetaAsset = BetaEquity / [1+(1-tc)D/E]

  • NYSE 60 trading days estimated :

Beta Equity Boeing =1.62Market-value debt/equity ratio = 0.525BetaAsset = 1.62/[1+(1-0.35)0.525] = 1.21

  • Exhibit 10 indicates the percentage of revenues derived from government for Lockheed Martin and Northrop Grumman is 93% and 91%, which will help to estimate beta asset of defense.
  • NYSE 60 trading day Beta Equity LM for Lockheed Martin = 0.37
    • Debt /equity ratio for Lockheed Martin = 0.410
    • Betaasset defense = 0.37/[1+(1-0.35)0.41] = 0.29
    • S&P500 60 trading day BetaEquityNG for Northrop Grumman=0.30
    • Debt/equity ratio for Northrop Grumman = 0.640
  • Betaasset defense = 0.30/ [1+(1-0.35)0.640] = 0.21
    • Average beta of defense = 0.25
      • Exhibit 10, Boeing Rev from Defense (Wdefense) = 0.46
    • Boeing Rev from Commercial Sales (Wcommercial) = 0.54
    • βBoeing= βcommercial* Wcommercial + βdefense*Wdefense
    • 1.21= βcommercial *0.54+0.25*0.46
    • β asset commercial =1.095/0.54= 2.03
    • β equity commercial =2.031+(1-0.35)0.525=2.72
    • re = Rf + β*E(Rm)- Rf]



WACC= % debt (rd)(1-tc)+ % equity(re)



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Boeing 7E7 Case Study Solution: Is there anything else the board of directors should consider in assessing the financial appeal of this project?

There are a few different approaches to calculating the economic viability of the Boeing 7E7 project before making a decision about whether or not to move forward with it. These include the Payback period (which does not account for the time value of money, but is simple to calculate and is based on projects with higher liquidity), as well as the Discount Payback period (which is based on projects with higher liquidity) ( it consider the time value of money).

The Boeing 7E7 was a long-term project that required a significant investment to get off the ground. This is yet another reason why it was delayed. Therefore, more time will be required to accumulate the most wealth and settle all financial obligations. In the event that this is not the case, the money that has already been invested in the project by the board of directors will be wasted.

Boeing 7E7 Case Study Solution: What should the board do?

As the first plane to use carbon body construction and employ wingtip extenders, both of which will add to the level of risk because they have never been used on large-scale projects before, the board should approve the launch of the Boeing 7E7 Project despite the high level of risk associated with the project due to its design. Not mentioning that Airbus is about to introduce their brand new A380 would be negligent of us. Boeing should go ahead with the launch of the 7E7 because it will have a lower fuel requirement and will be able to carry a larger number of passengers.

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