Recommendation

Boeing should go forward with the Boeing 7E7 Project. There are uncertain risks in
this project regarding the new materials used (composite carbon) and design with
wingtip extenders. These risks are relevant because Boeing 7E7 is the first type of
airplane applying these new elements. However, with the harsh competition from
Airbus, which is designing its new large commercial airplanes to be launched in
2005, Boeing will fall behind in innovation, fuel efficiency, and customer capacity if
the 7E7 is not developed. Boeing needs to take these risks and develop the 7E7 to
provide the cost-saving and large capacity airplanes, which are the expectations of
airline companies in the current fluctuating economy.
In terms of shareholders wealth, the 7E7 project has the IRR of 15.66% while
Boeings WACC is at 13.72%. The IRR is about 1.5% better than the WACC, which
signifies that the 7E7 will more likely create value to Boeing and its shareholders.
The 7E7 project will be a driver for Boeing to keep the company competitive and
successful in the market; and to regain shareholders trust regarding the companys
capability of innovation after two cancelled projects in the early 90s.
Alternative Perspective
The 7E7 Project has a very large initial cost at about $8 billion. Even though its
success rate and potential outcome are attractive, it has too much of a risk if it fails.
Additionally, the current market is somewhat dimmed for the commercial aviation
industry with many negative world events such as the 9-11 terrorist attack, the
outbreak of SARS, etc. Therefore, Boeings board could instead focus on its
integrated defense system business. Boeing is currently the second largest provider
of military aircraft in the US and 46% of Boeings revenue is from this line of
business. With the US governments combat plan in Iraq and the rising level of
worldwide terrorist attacks, Boeing could expect to get more orders for its
integrated defense system, which would contribute considerably to its bottom line.
Financially, according to table below, if Boeing continues its 7E7 project, its military
lines WACC would be 13.72%. Meanwhile, the WACC of the military line without the
7E7 project would be 5.09%. Therefore, Boeing would be a much safer investment
to the investors, but the returns they can earn from Boeing would also shrink.
Focusing on military line seems to be a better choice for Boeing; however, Boeing
will lose its market share in the commercial aviation market, which it still is a giant
participant and contributes 54% of its revenue. The revenue from the commercial
aviation market is considerably large and will dominate the revenue from its
integrated defense system business.