A reverse of this trend is crucial to reach some of the projected sales numbers that Boeing is counting on. There are several factors to these lower numbers. A decrease in business travel has occurred due to cost and the advance of conferencing technologies. And lastly, the weak economy has vacationers thinking of local destinations instead of traveling abroad. Market Share Boeing’s fiercest competitor is Airbus. It is crucial that the new 7E7 delivers on its promise of lower operating cost.
This will help command a larger share of the market. This becomes even more important if the economy doesn’t recover as quickly as we hope.
The other aspect of the 7E7’s success is the engineering of an expandable wing. Adding this versatility will give the 7E7 owner more options for travel routes.
The following is the sensitivity analysis of the Boeing project which gives optimistic and pessimistic estimates for the underlying variables of volume and cost of sales.
The purpose of the sensitivity analysis is to express cash flows in terms of the variables of this project. Boeing had to determine what the decide what the underlying variables were which in this case happen to be development costs and the per-copy costs to build the 7E7.
For the project to increase shareholder wealth, Boeing would have to sell at least 2,500 aircraft over a 20-year period. Airbus is a close competitor. They will be coming to market with a new A380. If Boeing falls behind regarding innovation, they may lose their market share.
For Boeing to have a future in the aviation industry, they must take the risk to develop this new place. With the economy so volatile, airlines will be looking for options that reduce their operational costs. The 7E7 will do this. The success of the expandable wing will give the plane attractive versatility.
Fuel prices are also on the rise, this is yet another reason why a plane with a lower operating cost will succeed in the future The equity market risk premium should equal the excess return expected by investors on the market portfolio. In this case it was calculated to be 7. 14%. The weighted average cost of capital (WACC) was calculated to be 15. 443%. For the project to increase shareholder wealth, the IRR of the project should at least equal the WACC. For this to happen Boeing would have to sell at least 2500 airliners in a 20-year period.