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

2. Should Boeing’s Board approve the 7E7?

3. How would we know if the 7E7 project will create value?

4. Okay, let’s examine the details of how to estimate the WACC. Let’s go step-by-step. Where shall we get started?

5. The weighted-average cost of capital is a simple formula. Yet it seems that reasonable people can disagree about the estimates. How can there be such a range of cost of capital estimates? Please summarize the issues.

6. Have we thought of everything? Is there anything else the board of directors should consider in assessing the financial appeal of this project? Why might the board vote “yes” on the 7E7, when the cost of capital estimate is greater than the IRR? Why might the Board vote “no” if the cost of capital estimate is less than the IRR?

7. What should the board do?

In 2003, the Boeing Company announced plans to build a new “super-efficient” commercial jet called the “7E7” or “Dreamliner.” This was a “bet the farm” gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe, as well as the fact that it would penetrate a rapidly growing market segment, were arguments for approval of the project. On the other hand, the current market for commercial airplanes was depressed because of terrorism risks, war, and SARS, a contagious illness that resulted in global travel warnings. Boeing’s board of directors would need to weigh those considerations before granting final approval to proceed with the project.

The task for students is to evaluate the 7E7 project against a financial standard, the investors’ required returns. The case gives internal rates of return (IRR) for the 7E7 project under base-case and alternative forecasts. The students must estimate a weighted-average cost of capital (WACC) for Boeing’s commercial-aircraft business segment in order to evaluate the IRRs. As a result of that analysis, the students identify the key value drivers and distinguish, on a qualitative basis, the key gambles that Boeing is making.