Boeing Case Solution
QUESTION NO 1:
The calculated IRR for the project is 15.7%.This rate of return is calculated by taking the effect of forecasted free cash flows of the project. The assumption taken in account was that ‘Dream line’ aircraft would provide 16% return i.e. theIRR to the investors. The forecasted values for IRR which is streamlined with the assumed figure is 15.7%. It means that project would be feasible if it would fetch above 15.7% return from the investor prospect, and maintaining the units sold over and above 2500. Thus by getting 5% premium above the minimum assumed price project would be feasible.
But IRR analysis shows risks as well, if different variations are considered for the project i.e. cost of construction, development costs, design cost and production costs as well. Some other factors might also hinder the performance of the Airbus.If the travel demand gets worsened or any other company enters the market with the new competitive product.
By considering all the above factors, the IRR should be 15.7 % or above for the prospective years, and by this the project’s viability increases.
QUESTION NO 2:
The beta used in the analysis (refer excel sheet), is the beta given in the case study in exhibit no. 10. The choices available to use beta factor to evaluate the risk in the project comprises of:
The beta for 60 months, 21 months and 60 trading days. The beta used in the analysis is for 60 months. The reason for using it in the analysis is the fact that airline industry invests in manufacturing new jets on long term basis. The pros and cons of investing the venture must be evaluated in long-term. The betas for the lesser time durations are volatile, and cannot epics the truer risk which company might face after investing into this venture.
The selection is made from S&P 500 index values, because the values by them are more authentic and reliable. Analyst mostly considers their values for determining thefinancial viability of the projects. The figures from the financial data of the companies under the same industryare not considered,because most of the revenues of such companiesare drivenfrom government. Hence BOEING is earning only 46% of the revenue from government sectors. To make the analysis clear and uniform. The averages of the comparable figures are not considered. Correspondent market risk premium and other variables are used from the available sources in the light of beta determined.
QUESTION NO. 3:
The cost of debt is determined by using the figures extracted from the financial data of the company is given in the excel sheets.
QUESTION NO 4:
The weighted average cost of capital is calculated (refer Excel sheet).
The composition of debt and equity i.e. the relative weights used in the calculation are extracted from the financial data given in the case study under the heading of exhibit 10. The proportions of debt and equity are also calculated with their relative percentages from the balance sheet of the company as well. The percentage used in the analysis is taken from the exhibit 10 as calculated under special considerations.Which shows the market value of debt/equity ratio for Boeing, thus for the financial evaluation, this percentage is considered for calculating WACC In our analysis.
QUESTION NO 5:
The project shows positive NPV as well as attractive IRR. The project shows viability regardingWACC as well. Different kinds of uncertainties (economic uncertainties) are not measured by the financial values, as determined in the analysis.Hence under the given scenario, and estimated WACC the project is agood investment for Boeing. The WACC calculation is the representation of the ratio calculated according to the market value. Hence the chances of calculating inaccurate WACC gets decrease by this approach.
QUESTION NO 6:
The sensitivity analysis available, and calculated both shows the positive trend. The variable taken in the analysis is thecost of equity and cost of debt. By taking such variables and calculating different percentages of WACC. It shows that when thecost of equity increases WACC increases. The company should reduce their debts, and should consider equity financing to maintain the positive trend in WACC.Therefore reducing the possible risks and uncertainties of the project.
QUESTION NO 7:
By considering all the factors and viability concerns, calculating WACC, IRR and other financial variables as well it can be concluded as:
The project is viable in the long run. Hence the positive NPV is the biggest indicator of the financial viability, and great inflows from the project. The IRR is also reasonable to believe that project would fulfill the investor’s prospects and estimates. Moreover, it can be said that the Boeing in the long run, would earn the desired revenues. It is because tourism has no ending, and by providing efficient services they can make their project fruitful in the long run.
The gamble should be taken as an opportunity to provide better-midsized aircraft, as world's GDP is also increasing, so there are fewer chances for failure in the long run................................
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