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