The Boeing Company
Response to the following problem:
As you probably know, Boeing builds airplanes. While most famous for the big 747, Boeing is continually developing newer models. Over the past several years, Boeing has been developing the 737 and 777 families of airplanes. In 1996, Boeing formed a joint venture with General Electric to develop planes that can fly over 6,000 miles without refueling.
1. What factors must Boeing consider when making the decision to produce a new family of airplanes like the 777? What would be the expected cash inflows, and what would be the expected cash outflows? Categorize the outflows into two types: one-time outflows and annual outflows.
2. The costs of developing a new family of airplanes are enormous. Why would Boeing agree to incur these costs when it is able to continue producing older model planes like the 747 and the 767? Frame this discussion in terms of a capital budgeting decision. That is, evaluate the opportunities in terms of cash inflows and cash outflows.