Boeing 777 Project Group Report
Winter 2013

Group Number: 3

Participating Group Members:

Chris Cardillo
Jingshu Dang
Shanlin Li
Xun Yin
Yigong Zhu

Boeing 777

In October 1990, the Boeing Company announced that it was launching a new aircraft model, the 777. The company praised the superior technology of the product and the fact that it filled a gap in Boeing’s product line. Moreover, it was targeted to service routes in a critical high growth market segment. The chief objective of the analysis is to evaluate the 777 against a financial standard. The case gives internal rates of return (IRRs) for the 777 project base case and alternative forecasts. The principal analytical problem of the case is an estimation of a weighted average cost of capital (WACC) for Boeing’s commercial aircraft division in order to evaluate these IRRs. The analysis should also identify ‘key value drivers’ and distinguish, on a qualitative basis, the key gambles Boeing is making.

Capital budgeting projects should promote the primary goal of the firm; therefore, the primary goal directs decision making. Frank Shrontz, Boeing’s CEO, says his mission is raising Boeing’s return on equity from the recent average of about 12 percent. Is the primary goal of Boeing improving return on equity?

1. Frank Shrontz says he wants to improve Boeing’s return on equity. How might the 777 project serve that mission? Is improving return on equity the same as maximizing shareholders’ wealth?

2. Boeing has historically shown an aversion to debt financing with the book value of debt making up only 4 percent of total capital (page 201). Is this low leverage consistent with the goal of increasing return on equity?

3. Can we assume that Boeing’s primary goal is maximizing shareholders’ wealth?

Your decision on the Boeing 777 will be in the context of the