Boeing 777 QUESTION 1: The WACC that Boeing should use to discount the cash flows for the Boeing 777 investment is the WACC of the Boeing’s commercial division. Step 1: We needed to calculate the Beta of the commercial division of Boeing. We know that Beta of Boeing Corp. is the weighted average of the defense division Beta and the commercial division Beta. We started by calculating the unlevered Beta of Boeing Corp. We did that by unlevering the long-term Boeing Betas i. e. , more than 4 years. Then we took the average of the unlevered Betas.

We then moved to calculate Boeing’s defense division Beta. We assumed that the average Beta of the three comparable companies whose revenue is mainly derived from defense (85% and above) would be a good estimate. Here we assumed that the Beta of debt is zero for Boeing and the others. We also assumed that all have the same marginal tax rate of 34%. For each of the three companies, we unlevered the long-term Betas i. e. , more than 4 years. Then we averaged the Betas to obtain the Beta for each company.

Then we calculated the Beta defense by averaging the Betas of the three companies. Levered Beta| Boeing| Grumman| Northtrop| Lockheed| B/S| 0. 018| 1. 756| 1. 288| 1. 182| B/V| 0. 018| 0. 637| 0. 563| 0. 542| | | | | | Value Line| 1. 00| 0. 95| 1. 00| 1. 10| Data Stream| 1. 06| 0. 53| 0. 94| 0. 97| S&P 500 (58 Months)| 0. 81| 0. 80| 0. 74| 0. 87| S&P 500 (12 Months)| 1. 37| 0. 73| 0. 72| 0. 69| S&P 500 (60 Days)| 1. 65| 0. 68| 0. 50| 0. 52| NYSE (58 Months)| 0. 87| 0. 86| 0. 79| 0. 95| NYSE (12 Months)| 1. 1| 0. 80| 0. 77| 0. 75| NYSE (60 Days)| 1. 79| 0. 73| 0. 53| 0. 57| | | | | | | | Betas not considered for calculation| | | | | | Unlevered Beta| Boeing| Grumman| Northtrop| Lockheed| B/S| 0. 018| 1. 756| 1. 288| 1. 182| B/V| 0. 018| 0. 637| 0. 563| 0. 542| | | | | | Value Line| 0. 99| 0. 44| 0. 54| 0. 62| Data Stream| 1. 05| 0. 25| 0. 51| 0. 54| S&P 500 (58 Months)| 0. 80| 0. 37| 0. 40| 0. 49| S&P 500 (12 Months)| | | | | S&P 500 (60 Days)| | | | | NYSE (58 Months)| 0. 86| 0. 40| 0. 43| 0. 53|

NYSE (12 Months)| | | | | NYSE (60 Days)| | | | | Average| 0. 92| 0. 36| 0. 47| 0. 55| Unlevered Boeing Corp. Beta = 0. 92 Unlevered Boeing Defense Beta = (0. 36 + 0. 47 + 0. 55) / 3 = 0. 46 Unlevered Beta Boeing Corp. = 0. 26*Unlevered Beta Boeing Defense + 0. 74*Un-levered Beta Boeing Commercial Un-levered Boeing Commercial Beta = 1. 09 Step 2: Lever up the Beta of Boeing’s commercial division Levered Boeing Commercial Beta = Unlevered Commercial Beta*{1 + (1 – t)*B/S} Levered Boeing Commercial Beta =1. 1

Step 3: Calculate rs (Return on Boeing’s Commercial Division/777 Project) rs = rf + (rm – rf)* Boeing’s Commercial Division Beta rs = 8. 82% + (5. 4%)*1. 1 rs = 14. 8% Step 4: Calculate WACC WACC = rb*(1 – t)*B/V + rs*S/V WACC = 14. 6% QUESTIONS 2 & 3: By plugging the WACC in the DCF, we get the following NPV and IRR. We have considered three scenarios: | Scenario 1: Unit Price = $100 M| Scenario 2: Unit Price = $120 M| Scenario 3: Unit Price = $130 M| NPV| $ 576 M| $ 1333 M| $ 1711 M| IRR| 16. 2%| 18. 0 %| 18. 8%|