Wright Aircraft, Inc. Wright Aircraft is the global leading builder of long-haul jet aircraft for civilian aviation.
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Wright Aircraft, Inc. | ||||||||||
Wright Aircraft is the global leading builder of long-haul jet aircraft for civilian aviation. | ||||||||||
Management expects the company to maintain its leadership for the foreseeable future. | ||||||||||
Wright is considering two projects to develop an improved engine control system to | ||||||||||
to improve fuel utilization (an important factor in airlines' aircraft purchase decisions). | ||||||||||
Cash flows due only to sales of the new system are included in | ||||||||||
(Assume the projections reasonably reflect the facts of the case.) | ||||||||||
Project Lindbergh utilizes a revolutionary technology to increase fuel utilization 15%. | ||||||||||
Project Lindbergh's system can be used on all airline aircraft, whether purchased from Wright | ||||||||||
or its competitors, and on Wright's next product generation. | ||||||||||
Project Post utilizes an existing technology that promises to increase fuel utilization 5%. | ||||||||||
Project Post's system can be used on Wright aircraft only. | ||||||||||
What discount rate should you use for each project? Why? | ||||||||||
What decision should Wright's management make? Why? | ||||||||||
Project Lindbergh | ||||||||||
(000s of $s) | ||||||||||
Chapter 1: R&D Phase | Chapter 2: Launch and Commercialization | |||||||||
Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | ||
($7,500) | ($6,000) | ($3,500) | ($1,500) | $60,000 | $125,000 | $175,000 | $235,000 | |||
PV | ||||||||||
Probability of | ||||||||||
Techical Success | ||||||||||
Stage Gate 1 - End of Year 2 | 35% | |||||||||
Satge Gate 2 - End of Year 4 | 55% | |||||||||
Discount Rate | 25% | because of the commercial risk of new system | ||||||||
Project Post | ||||||||||
(000s of $s) | ||||||||||
Chapter 1 Cash Flows | Chapter 2: Launch and Commercialization | |||||||||
Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | ||
($5,500) | ($3,000) | ($1,500) | $10,000 | $20,000 | $25,000 | $35,000 | $45,000 | |||
Probability of R&D Success | 60% | |||||||||
(1 stage gate - end of Year 2) | ||||||||||
Discount Rate | 15% | because of lower commercial risk |
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