Boeing Analysis

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Provide a brief overview of the relevant issues and summarize your recommendations.

In early 2003, Boeing announced its plans to develop a new airplane (7E7 & 7E7 Stretch) in a market that was facing a tight squeeze on profits. The decline in the airline industry was attributed in large part to the war in Iraq, international terrorism, and fear of spreading SARS. The development of this new aircraft could possibly bring Boeing out of their innovation slump and potentially give them an advantage in the mid-sized aircraft market.

Since 1994, Boeing had not put a new airplane into production and had failed to follow through on two commercial aircraft programs. The company was in desperate need of an aircraft that would set them apart from Airbus, their main competitor and market leader. Boeing’s vision for the 7E7 was a cost efficient plane that used less fuel, had cheaper operating costs, and flexibility for short or long haul routes. The new plane would be made with cheaper composite parts which would reduce the production time from 20 days to 3 days.

The new project faced some concerns. The cost efficiency relied on the use of composite materials that had not gained regulators’ confidence. Also, Boeing would have to design completely new production methods for this new plane. Unfortunately, Boeing has a track record of problems with their production methods and delivering planes on time. The board of directors also expected development cost estimates to be substantially reduced prior to approving such a product. The demand in the market was for cheaper and more efficient planes, and that ideology needed to be part of Boeing’s development strategy.

Airbus, the market leader, produced planes to serve the short, medium and...

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...R and was determined to be favorable. Assuming that the numbers used to calculate WACC and IRR are accurate or conservative, the 7E7 project should be successful if the risk factors are effectively controlled by Boeing. However, the most important factor in determining if a project should go forward or not is the NPV of the project. If the project has a positive NPV, then the project generally should go forward. For the Boeing 7E7 project, the NPV is $5,266,550,000 using the cash flow data provided through 2037. The NPV is based on the premise that the forecasted cash flow for the 7E7 project is accurate. According to the NPV, Boeing should go forward with the project as it will add value to the stock based on the data collected, with no indication that the 7E7 project will interfere with other projects already in progress or potential projects up for consideration.
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