Why Is Boeing Contemplating the Launch of the 7e7 Project? Is This a Good Time to Do So?

1. Why is Boeing contemplating the launch of the 7E7 project? Is this a good time to do so?

In early 2003, Boeing announced its plans to develop a new airplane in a market that was facing a tight squeeze on profits. The decline in the aircraft industry was attributed in large part to the war in Iraq, international terrorism, and SARS. Boeing’s expansion with the 7E7 could quite possibly give the distinction that they needed and potentially redeem their threatened position in the market. Boeing despairingly needed an innovative idea that would distinguish them from their rival, Airbus. Boeing conceived the idea for the 7E7 with the hopes of replacing the A300/310, which had propelled Airbus to successfully into garnering 57 percent of the market shares with the A300/310. Boeing’s project was not without its concerns. Boeing had a myriad of things to consider prior to the recommendation of any option regarding the launch of the 7E7. The company needed to evaluate its own standing, as well as the potential of costs incurred at a possible sum of ten million dollars. Development costs in the aircraft industry could be quite significant, yielding a considerable amount of ongoing negative cash flows. The success of the 7E7 project depended heavily on Boeing's ability to keep the production costs down, and to actually deliver a more efficient aircraft with decreased production time. A final consideration to be addressed was the fact that the company is structured as two individual entities, one side being the integrated defense systems and the other being the commercial aircraft business. The integrated defense systems side encountered substantial revenue increases due to the war and fear of terrorism. At this juncture, the commercial aircraft division was experiencing an uncertain market. Analysts believed that Boeing had important technology advantages as a result of the transferability of research and development between the two divisions. It is a great time for Boeing to launch the project. The Boeing 777 Project may contribute to an improvement in net income and return on equity if, over time, total revenues generated by the project exceed total cost and the resulting returns from the investment are higher than Boeing’s opportunity cost of capital.

2) Richard Risk-Free Rate

According to the Boeing Case Study, the reported yield on a 30 year treasury bond was 4.56% as of June 2003.

Equity Market Risk Premium (EMRP)

According to the Federal Reserve database in St. Louis1, the arithmetic average return on market rate for the S&P 500 was 11.41% from 1928 through 2015. This time period is adequate enough to prevent any effects of extreme fluctuation. The risk-free rate is 4.56%. The EMRP is calculated as 6.85% (0.1141