Getting Off the Ground at Boeing
Discussion:
By the time Boeing announced the newest addition to its fleet, the Boeing 7X7, much of the preliminary work was already computed. The 7X7 was an enormous undertaking. Research and development, begun two and a half years earlier, would cost between $4 billion and $5 billion. Production facilities and personnel training would require an additional investment of $2.0 billion, and $1.7 billion in working capital would be required. Exhibit 6-4 furnishes profit, depreciation, and capital expenditure projections for the 7X7 project.
The case also provides the following information:
Boeing's beta 1.06
Boeing's market-value debt ratio 0.02
Boeing's new issue rate for long-term debt 9.75%
Riskless return 8.75%
Market risk premium 8.00%
Boeing's marginal income tax rate 34%
Determine whether Boeing should proceed with the 7X7 project.
1. Calculate the NPV, IRR, and payback for the project.
2. On the basis of your analysis, do you think Boeing should have continued with this project? Explain your reasoning.
Exhibit S-6-1
Projected CFATs for the Boeing 7X7 Project
(Dollars in millions)
|
Year
|
After-Tax
Profit
|
Depreciation
|
Capital
Expenditures
|
CFAT
|
|
1
|
-597.30
|
40.00
|
400.00
|
-957.30
|
|
2
|
-947.76
|
96.00
|
600.00
|
-1,451.76
|
|
3
|
-895.22
|
116.40
|
300.00
|
-1,078.82
|
|
4
|
-636.74
|
124.76
|
200.00
|
-711.98
|
|
5
|
-159.34
|
112.28
|
182.91
|
-229.97
|
|
6
|
958.62
|
101.06
|
1,741.42
|
-681.74
|
|
7
|
1,718.14
|
90.95
|
2.12
|
1,806.97
|
|
8
|
1,503.46
|
82.72
|
-327.88
|
1,914.06
|
|
9
|
1,665.46
|
77.75
|
67.16
|
1,676.05
|
|
10
|
1,670.49
|
75.63
|
-75.21
|
1,821.33
|
|
11
|
1,553.76
|
75.00
|
-88.04
|
1,716.80
|
|
12
|
1,698.99
|
75.00
|
56.73
|
1,717.26
|
|
13
|
1,981.75
|
99.46
|
491.21
|
1,590.00
|
|
14
|
1,709.71
|
121.48
|
32.22
|
1,798.97
|
|
15
|
950.83
|
116.83
|
450.88
|
616.78
|
|
16
|
1,771.61
|
112.65
|
399.53
|
1,484.73
|
|
17
|
1,958.48
|
100.20
|
-114.91
|
2,173.59
|
|
18
|
1,691.19
|
129.20
|
178.41
|
1,641.98
|
|
19
|
1,208.64
|
96.99
|
627.70
|
677.93
|
|
20
|
1,954.39
|
76.84
|
144.27
|
1,886.96
|
|
21
|
2,366.03
|
65.81
|
100.51
|
2,331.33
|
|
22
|
2,051.46
|
61.68
|
-463.32
|
2,576.46
|
|
23
|
1,920.65
|
57.96
|
-234.57
|
2,213.18
|
|
24
|
2,244.05
|
54.61
|
193.92
|
2,104.74
|
|
25
|
2,313.63
|
52.83
|
80.68
|
2,285.78
|
|
26
|
2,384.08
|
52.83
|
83.10
|
2,353.81
|
|
27
|
2,456.65
|
52.83
|
85.59
|
2,423.89
|
|
28
|
2,531.39
|
52.83
|
88.16
|
2,496.06
|
|
29
|
2,611.89
|
47.52
|
90.80
|
2,568.61
|
|
30
|
2,699.26
|
35.28
|
93.53
|
2,641.01
|
|
31
|
2,785.50
|
28.36
|
96.33
|
2,717.53
|
|
32
|
2,869.63
|
28.36
|
99.22
|
2,798.77
|
|
33
|
2,956.28
|
28.36
|
102.20
|
2,882.44
|
|
34
|
3,053.65
|
16.05
|
105.26
|
2,964.44
|