The Boeing 777: A Financial Analysis of New Product Launch



The Boeing 777: A Financial Analysis of New Product Launch

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Eduardo Lioy

Keya Williams

Ritwik Malvi

Jonas Angeles

Alexis Heideck

 

1. Introduction/ Case Summary:

The Boeing Company is an Industrial Aircraft Design and Manufacturing Firm, diversified in its offering of products for both the Defense Industry and the Commercial Airline Industry. In October 1990, CEO Frank Shrontz has announced the launch of a new product, the Boeing 777. A medium-to-large passenger aircraft, the 777 would enable the flexibility to carry passenger loads ranging from 350-390 passengers, over distances up to 7600 nautical miles. Already, Boeing has received orders from United Airlines, with delivery expected in May 1995 (p. 198). Aside from the technological advances represented in the 777, the launch of this new product promises some potential distinct strategic advantages. The launch of the 777 would provide a medium-to-large aircraft, filling a gap in Boeing’s total passenger aircraft product line. Boeing would now have a complete suite of aircrafts capable of addressing passenger loads ranging from 100-500. The 777 is specifically targeted to service routes in a high growth segment of the market, influenced heavily specifically by the high growth rate of the Asian market. The following is a financial analysis of the anticipated launch of the 777 product line. The analysis includes a comprehensive quantitative financial analysis of the projects profitability along with a qualitative analysis of the strategic importance of the project in the economic and political context of the time and an assessment of how those key factors can impact the profitability of the project. Also offered are global recommendations regarding the Boeing 777 project, given the results of financial analysis and the consideration of other key factors.

 

2. Profitability measures and the Boeing 777 project  

Return on Equity (ROE) is a commonly used profitability measure; according to the case, maximizing ROE is also a key objective of Boeings CEO Frank Shrontz. ROE is defined as the ratio between net income and total equity; it is an accounting measure of how well stockholders fared during the year. By improving the ROE, shareholders’ wealth would be increased. Therefore, it appears that Frank’s goal of improving Boeing’s ROE is in line with that of increasing shareholders’ wealth.

However, accounting book values are significantly impacted by the firm’s accounting practices, and what is really relevant for the shareholders are actual cash flows to stockholders. As such, the key measures from the stockholders’ wealth perspective are dividends and stock value (dividend gains and capital gains). In order to really increase shareholders’ wealth, the company’s equity (the stock) needs to provide a return higher than the opportunity cost of capital that could be earned elsewhere on the capital market for an investment of comparable risk.

The Boeing 777 Project may contribute to an improvement in net income and ROE if, over time, total revenues generated by the project exceed total cost and the resulting returns from the investment are higher than Boeing’s opportunity cost of capital. In other words, the 777 Project will improve shareholder’s wealth as long as the NPV of its cash flows is positive (as long as the IRR is greater than the opportunity cost of capital).

If Boeing’s revenue and cost forecast in Exhibit 6 is accurate (1000 planes sold over 10 Years at $130M per plane), the 777 Project would deliver an IRR of 18.9%; thus, shareholders’ wealth would be increased as long as the relevant opportunity cost of capital is ................
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