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The 7E7 ProjectAdil BouzoubaMohammed Amine BekkalAbdou ZainabHannaoui HafidaOutlineCompany BackgroundCase OverviewCase Issue Technical PartBackground of BOEING Founded in 1916, Boeings first customer was the government of New ZealandGeorge Conrad Westervelt and William Boieng built planes as a hobby The first plane, named the B&W Seaplane was used for pilot and airmail Boeing became the largest aicraft manufacter in the US during WWI and WWIIBOEING Business UnitsBoeing Commercial Airplanes : the leader in commercial aviation

Boeing Defense, Space & Security: provides large scale systems that enhance air-, land-, sea- and space-based platforms for global military, government and commercial customersBOEING 7E7

In January 2003, The 7E7 project was annouced by Michael Bair Boeing hopes the 7E7 project will help it regain the commercial-aircraft sales that the company had lost over the years to AirbusBoeing envisioned a higher-efficiency aircraft with lower operating costsBoeing was considering two new members for the 7E7 family, which are a basic and a stretch versionPoint 2 After the highly successful launch of the Boeing 777 with United Airlines in June 1995, Boeingexperienced a drought of novel commercial aircrafts for the next several years. So, later in 1990s, the747X and Sonic Cruiser projects were cancelled due to insufficient market interestPoint 3 : Through advancements in airframedesign, jet engine technology, and the use of composite materials, the new 7E7 aircraft would also bemore environmentally friendly than its predecessors.-----The Boeing 7E7 baseline is a super-efficient airplane with new passenger-pleasing features. It will bringthe economics of large jet transports to the middle of the market, using 20% less fuel than any otherairplane its size.-----The Boeing 7E7 Stretch is a slightly bigger version of the 7E7 Baseline. Both are super-efficient airplaneswith new passenger-pleasing features. The Stretch will bring the economics of large jet transports to themiddle of the market, using 20% less fuel than any other airplane its size5Main Competitor of BOEING Airbus, established in 1970 by a consortium of European companies Airbus is an aircraft manufacturing subsidiary of EADS (European Aeronautic Defense and Space Company N.V.)In 1999, for the first time in its history, it recorded more plane orders than its rival Boeing.it took Airbus 23 years to deliverits first 1000 aircraft, another 6 years to deliver the next 1000 and only another 3 years (2002) to passthe 3000 aircraft milestone

6IssuesComposite Materials

In 2003, the Boeing Company announced plans to build a new super-efficient commercial jet called the 7E7 or Dreamliner. 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 in bad shape because of terrorism risks, war, and SARS. Boeings board of directors would need to weigh those considerations before granting final approval to proceed with the project.

1-That aircraft was the first to use carbon reinforced composite material but composite materials were considered the cause of plane crash in 2001, so Boeing will have to prove the sustainability of composite materials.7The cost of production

IssuesSo Boeing have to change the production method if it had to use composites, and that would increase the cost of production.

The cost of development would be $ 10 billion approximately and the board of directors wanted to decrease it to 40% of what it took to develop the boeing 777

8commercial airplanes and integrated defense systems segments

IssuesBoeing had commercial airplanes and integrated defense systems segments. Revenues for defense system were rising whereas there was a loss of revenue in commercial airplane segment. The revenue from commercial aircrafts were estimated to be $22 billion in 2003 lesser than $28 billion revenues in 2002. And the demand of it dropped due to September 11 attacks hence the company reduce the production rates to half to maintain the profitability in that segment.

9Beta

Since the defense market is completely controlled by government, it is safe to assume that individual companys betas in the division will be fairly comparable to one another. From Exhibit 10, 93% of Lockheed Martins revenue is from defense and space. So, we can derive defense beta value for Lockheed Martin and attribute the same value to Boeings defense division. Alternatively, we could take the average value of betas for Lockheed Martin, Northrop Grumman, and Raytheon.

10Betaasset portfolio = (%Defense) * asset defense + (%Commercial) * asset commercial

0.78 = 46%* 0.48 + 54%* asset commercial

asset commercial = 1.03

equity (commercial) : 1.03 *[1 + (1 0.35)*0.525] = 1.3811IRR CAPMrequity (commercial) = rf + equity (commercial)*(rm rf)rf : 4.56% (30 year t-Bond 0.85%) equity (commercial) : 1.03 *[1 + (1 0.35)*0.525] = 1.38rm : 11.7%

requity (commercial) = 4.56% + 1.38 * (11.7% - 4.56%) requity (commercial) = 14.41%

In the case we are given the yields for a T-bill and a 30 year T-bond of .85% and 4.56% respectively. We chose to use the rate for the 30-year Treasury bond of 4.56% because the time horizon of the bond most closely matches the project timeline. 12Cost of Debt20032033YTM = 5.85%Project Duration 30 Yearsrd = cost of debt. We assumed that the debt would be for the entire period of the project which was 30 years, we took the YTM value from exhibit 11 for the maturity date in 2033 (i.e. 30 years from 2003) which is 5.85%

13WACCWACCcommercial = (%debt)(rd)(1-tc) + (%equity)(requity commercial)

D+E = 1 (0.525*E + E) = 1 1.525E = 1 E = 0.656

65.6% Equity 34.4% Debt

In the case we are given the yields for a T-bill and a 30 year T-bond of .85% and 4.56% respectively. We chose to use the rate for the 30-year Treasury bond of 4.56% because the time horizon of the bond most closely matches the project timeline. 14WACC

In the case we are given the yields for a T-bill and a 30 year T-bond of .85% and 4.56% respectively. We chose to use the rate for the 30-year Treasury bond of 4.56% because the time horizon of the bond most closely matches the project timeline. 15

ConclusionThe project is economically attractive even under most of the worst cases as explained in the sensitivity analysis.Airbus will dominate the market if Boeing doesnt take up this project.17