1. What is an appropriate required rate of return against which to evaluate the prospective
IRRs from the Boeing 7E7?

a. Please use the capital asset pricing model to estimate the cost of equity.
b. Which equity market risk premium (EMRP) did you use? Why?
c. What Beta did you use and how did you derive it?
d. Which risk-free rate did you use? Why?
e. Which capital-structure weights did you use? Why?

2. Judged against your WACC, how attractive is the Boeing 7E7 project?

a. Under what circumstances is the project economically attractive?
b. What does sensitivity analysis (your own and/or that shown in the case) reveal about
the nature of Boeing's gamble on the 7E7?
3. Should the board approve the 7E7?

1. What is an appropriate required rate of return against which to evaluate the prospective IRRs from the Boeing 7E7?

From the case scenario, we see that computed IRR is 15.66%, hence the required rate of return should be at least, say 15.7% (to have NPV of the project > 0). There 3 possible scenarios involving NPV:
NPV > 0 - the project should be undertaken in the majority of cases (of course, depending on the market and availabilty of alternatives, we may choose which one to pursue and if to pursue it)
NPV = 0 - in we don't loose anything, but we don't again anything either. With a great volatility of the market, it's very easy to go from NPV = 0 to the negative NPV, therefore should be taken with a great caution.
NPV< 0 - pretty obvious answer - no, don't pursue it, unless the goal is not the monetary gain, but rather a market share for a future potential gain.

a. Please use the capital asset pricing model to estimate the cost of equity.

According to CAPM, Cost of Equity = Rf + Beta*EMRP = 1.05% + 1.43*2.75% = 4.98%,
where Rf is the Risk-free rate of return (3-month T-Bill),
Beta is obtained from the financial reports about the company (quote.com or finance.yahoo.com would give you an appropriate one), which essentially shows how the Boeing's stock fluctuates with respect to S&P Index,
EMRP is the Equity Market Risk Premium which is ...

Solution Summary

The solution estimates the cost of capital for the WACC and IRR.

Your company's weighted average cost of capital is 11%. You believe the company should make a particular investment, but the IRR of this investment is only 9%.
What arguments might exist in support of your position?
Is it really possible that making an investment with a return below your firm's cost of capital can ever c

Midwest Water Works estimates that its WACC is 10.5 percent. The company is considering the following capital budgeting projects:
Project Size Rate of Return
A 1 million 12.0%
B 2 million 11.5%
C 2

See attached file.
Provided to you are 2 rounds of separate WACC analysis.
Please provide an explanation of the WACC results and compare the rounds to each other.
Are the WACC results a positive outcome?

Chapter 8
Problems A 1
(Calculating the WACC) The required return on debt is 8%, the required return on equity is 14%, and the marginal tax rate is 40%. If the firm is financed 70% equity and 30% debt, what is the weighted average cost of capital?
A 4
(Estimating the WACC with three sources of capital) Eschevarria R

Smelting Machine
Probability Net Cash Flows per Year
0.2 $14,100.00
0.5 $16,000.00
0.2 $17,000.00
0.1 $20,000.00
Paving Machine
Probability Net Cash Flows per Year
0.2 $2,000.00
0.5

Your division is considering two projects with the following net cash flows:
year Project A Project B
0 (25) (20)
1 5 10
2 10 9
3 17 6
a) What are the projects' NPVs,

3.) Cochran Corporation has a weighted average cost of capital of 11% for projects of average risk. Projects of below-average risk have a cost of capital of 9%, while projects of above-average risk have a cost of capital equal to 13%. Projects A and B are mutually exclusive, whereas all other projects are independent. None of th

Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?
a. Both projects have a positive net present value.
b. Project A must have a higher NPV than Project B.
c. If the cost of capit

If a firm has a balance sheet with 50% debt and 50% equity, cost of debt of 6%, tax rate of 35%, and a cost of equity of 12%, what is the firms weighted average cost of capital?

Many firms use the weighted average cost of capital for the firm as the hurdle rate when comparing to IRR or as the discount rate in an NPV calculation. However, there is an implicit assumption being made when one does that. What problems can one encounter or what errors may occur if one uses the WACC for evaluating all projec