1. Boeing 777 – A Financial Analysis of New Product Launch
Alexis Heideck ● Eduardo Lioy ● Jonas Angeles Keya Williams ● Ritwik Malvi

2. Case Overview
Boeing
World’s leading manufacturer of commercial jet aircraft
Historical 54% market share
2 principal segments: defense & commercial aircraft
Sales of $27 Billion and expected profits of $1.4 Billion in 1990
50% profit increase from 1989
Main competitors: Airbus Industries & McDonnell Douglas
Oct 1990 = CEO, Frank Shrontz announces Boeing 777 launch
Shrontz’s mission: Raising Boeing’s ROE of 12%

3. Case Overview Boeing 777 350-390 Passengers International travel
Can travel up to kilometers
First delivery in May 1995
$130 million per plane
Fastest growing market segment (seats & distance)
Expected increase in airline traffic of 5.2% over next 15 years
Forecasted 10.6% growth in traffic to Asia
Kuwait Invasion
Political & economic uncertainties
Increase in oil prices and decline in airlines travel

4. Profitability Measures
Improving ROE = Accounting measure of increasing shareholders wealth
To improve ROE:
a) Increase Net Income
b) Reduce Total Book Equity
Better measure is CF to shareholders (dividends, capital gains). 777 contribution to CF is relevant.
According to projected cash flow:
Negative cash flow: First 5 yrs (decrease in ROE)
Projected positive cash flows for remainder of project
If Boeings projections hold 777 project will significantly increase Net Income, ROE.

5. Why Is The 777 Important?
Meets market need for medium to large aircraft
5.2% annual increase in airline traffic by 2010
passengers; travels up to 7600 miles
Expected sales of 1000 Units in first 10 years
Sales price of $100-$130 Million
Most Flexible and Cost efficient
Fly by wire technology

6. SWOT Analysis Strengths Weaknesses Boeing has a 50% market share
Carry up to 390 passengers ; 7600 miles
Fly by wire technology
Estimated savings in R&D spending of 20%
Involvement from engineering and airlines to ensure customer satisfaction
Folding wing tip technology
$97 Billion in backorders on aircrafts
Only firm order received by United Airlines
Large capital expenditures on manufacturing facilities and training (estimated $2.5 Billion)
Estimated Years to break even
Risks of depleting book value of equity if not successful

7. SWOT Analysis Opportunities Threats
Annual Increase in Airline traffic of 5.2% % in Asian market
Aging Aircrafts - Replacement value of 642 large aircrafts
Competition in niche market (Airbus Industries and McDonnell Douglas)
Competition may cause decrease in price ($130M to $100M)
Unknown length of war
Unstable political and economic climate
Increase in oil prices – decrease in airline travel and cancellation of orders

8. Determine Boeing’s WACC
To determine the appropriate WACC we used following formula: ( ) t r
debt
quity
WACC - + = 1 V D E e
And followed a stepwise approach:
(1) Calculate Boeing’s commercial aircraft division b
(2) Calculate Boeing’s Cost of Equity
(3) Calculate Boeing’s Cost of Debt
(4) Calculate Boeing’s WACC

9. Boeing’s Commercial Aircraft Division b
Reference market portfolio selection
S&P 500 selected (Boeing listed in S&P 500, index represents a close group of peer large cap US companies)
Reference time interval selection
12 months β selected because :
12 months data reflects current market conditions.
58 month data would provide an outdated picture
60 days data strongly biased by short term fluctuations.

10. Boeing’s Commercial Aircraft Division b
Calculate unlevered b’s for three “pure play” defense aviation companies (Grumman, Northrop and Lockheed).
equity
debt t) - (1 1
levered
unlevered + = b

11. Boeing’s Commercial Aircraft Division b
Re-lever the average b to reflect Boeings capital structure and obtain Boeings defense division b.
Calculate Boeings commercial aircraft division b using following relationship:
b commercial = 1.719 ( )
376 .
0.018
0.34) - (1 1
372
equity
debt t)
defense = + ÷ ø ö ç è æ
unlevered b
commercial
defense b + =
Boeing %

12. Determine Cost of Equity
From Boeing’s defense division b we can calculate the cost of equity using the Capital Asset Pricing model.
Risk free rate = 8.82 % (long-term U.S Treasury Bonds)
Market risk premium = 5.4% (64 year geometric average equity-market risk premium) % 10 . 18
719 1
.054) (
0882 ) - e = +
commercial
free
market
quity r b

13. Determine Cost of Debt
Estimate cost of debt using market rates of Boeing’s corporate bonds.
Boeing’s long-term debt consist entirely of two bond issues
Calculate weighted average of the market rate these two issues to arrive at a combined rdebt: 2 1
bond
bond2
bond1 V
debt r + = % 67 . 9
0931 37 5
234
.0973
234.5 = +
debt r

14. Weighted Average Cost of Capital (WACC)
debt
quity
WACC - + = 1 V D E e
Insert values for rdebt, requity and the relative equity and debt proportions: ( ) % 89 . 17 34 1 67 9
271.5
18.10% = - +
WACC r % 89 . 17 =
WACC r

15. Impacts of Economic Climate and Impending War
Long Term Impacts
β is a weighted sum of β’s for each division:
Changes in revenue from each division will affect β of each division
Factors affecting Commercial Division’s β:
Long-Term economic growth due to war spurring commercial air travel
Factors affecting Defense Division’s β:
Increased demand for and spending on defense products by government due to war

16. Impacts of Economic Climate and Impending War
Short Term Impacts
Events in Kuwait led to increase in fuel prices
Increased expenditure for airlines leads to price increases for customers
Temporary dip in passenger air traffic
Temporary decrease in demand for Boeing’s commercial division
Since the Boeing 777 project is 35 year long project, long-term impact is more relevant

17. Revenue/Cost Scenarios & Project Profitability
Key Assumptions
Key Assumptions Impacting Cash Flow:
Revenue Assumptions:
Sales Price
Sales Volume
Expenditure Assumptions:
R&D (as % R&D Expense / Sales)
GS&A (as % GS&A Expense / Sales)

18. Revenue/Cost Scenarios & Project Profitability
Sensitivity Analysis
Revenue Assumptions: Sales Volume and Sales Price
Extreme Low
Expected
Extreme High
Sales Volume (Units)
700
1000
1200
Sales Price
($ Millions)
$100
$130
IRR
13.9%
18.9%
20.6%
WACC = %

19. Revenue/Cost Scenarios & Project Profitability
Sensitivity Analysis
Expenditure Assumptions:%R&D/Sales and %GS&A/Sales
Extreme Low
Expected
Extreme High
% GS&A/Sales 7 4 1
% R&D/Sales 5 3
IRR
13.5%
18.9%
23.5%
WACC = %

20. Revenue/Cost Scenarios & Project Profitability
Assumptions and Real World Forces
Revenue Assumptions: PESSIMISTIC Impact
Sales Price: McDonnell Douglas/Airbus Industries competition (Sales Price = $100M)
Sales Volume: High gas price reduces demand to 700 units
Expenditure Assumptions: OPTIMISTIC Impact
R&D: Boeing could leverage defense knowledge (R&D reduced by 20% = $3.2-$4M or 2.6% R&D Expense/Sales)
GS&A: None specified, assume at baseline (GS&A = 4%)

21. Revenue/Cost Scenarios & Project Profitability
Revenue Assumptions: Pessimistic
Pessimistic Sales Price = $100M
Pessimistic Sales Volume = 700 units
Pessimistic Price Only
Pessimistic Volume Only
Pessimistic BOTH
Expected
Sales Volume (Units)
1000
700
Sales Price ($Millions)
$100
$130
IRR
16.1%
16.3%
13.9%
18.9%
WACC = %

22. Revenue/Cost Scenarios & Project Profitability
Expenditure Assumptions: Optimistic
Optimistic %R&D Expense/Sales = 2.6%
Optimistic assumes baseline GS&A at expected = 4%
Optimistic %R&D Expense/Sales
Expected
% GS&A/Sales 4
% R&D/Sales
2.6 3
IRR
19.5%
18.9%
WACC = %

23. DCF Analysis of Boeing 777 DCF Analysis supports Boeing 777 Project
IRR = 18.9 % (expected case) > WACC = %
Real World Forces may impact Key Assumptions, however some Pessimistic Forces likely Short Term
Revenue Assumptions – PESSIMISTIC
Expenditure Assumptions – OPTIMISTIC

24. Limitations of DCF Method
DCF Analysis of Boeing 777
Limitations of DCF Method
Static Model
Static assumptions projected for entire project – unrealistic
Real World Factors create uncertainty in modeling:
External Threats (including competitive landscape)
Interaction/Interdependence of divisions/projects on one another
Organizational Learning/Efficiency, Reduced Expenses Over Time
Sunk Costs
The Boeing 777 Case Specifically:
Competition and sales
Organizational learning and R&D expense
Ignores sunk costs of R&D expenses prior to October 1990

25. Recommendations Continue to innovate and invest
Need to update fleet and replace aging products
Decide which investment is correct:
Boeing’s 777 fills a gap and serves a fast-growing Asian market
777 project IRR’s range from 13.6% (pessimistic) to 23.6% (optimistic) while discount rates range from 10% - 20%
Project IRR exceeds baseline discount rate
The above data supports the strategic advantages of investing in the Boeing 777 launch

26. Thank You
Alexis Heideck ● Eduardo Lioy ● Jonas Angeles Keya Williams ● Ritwik Malvi