The IRR, which is consistent with "base case" assumptions, was 15.7 percent. But, the estimate of IRR was sensitive to variations in different assumptions. In particular, some obvious uncertainties would be the number of units that Boeing would be able to sell and at what price. For example, if Boeing only sold 1500 units in the first 20 years, then, as shown in Exhibit 9, the IRR would drop to 11 percent. This might occur if air travel demand worsened, or if Airbus entered this segment with a new competing product.
Additional unknown variables were the development costs and the per-copy costs to build the 7E7. Boeing's board was anxious to minimize those costs. The forecast assumes $8 billion for development costs: however, analyst estimates were in the $6 billion to $10 billion range. The cost to manufacture the 7E7 was also subject to great uncertainty On the one hand, engineers were challenged to build a mid-size aircraft with long-range capabilities. The engineering design to achieve this could push building costs up significantly. Conversely, if succeeded in using composite materials, which required a fraction of the normal assembly time, then construction costs would be lower. Consistent with Boeing’s history, the base case assumes 80 percent as the percentage of cost of goods sold to sales. As shown in Exhibit 9, however, the IRR of the 7E7 was very sensitive to keeping production costs low
The IRR, which is consistent with "base case" assumptions, was 15.7 percent. But, the estimate of IRR was sensitive to variations in different assumptions. In particular, some obvious uncertainties would be the number of units that Boeing would be able to sell and at what price. For example, if Boeing only sold 1500 units in the first 20 years, then, as shown in Exhibit 9, the IRR would drop to 11 percent. This might occur if air travel demand worsened, or if Airbus entered this segment with a new competing product.
Additional unknown variables were the development costs and the per-copy costs to build the 7E7. Boeing's board was anxious to minimize those costs. The forecast assumes $8 billion for development costs: however, analyst estimates were in the $6 billion to $10 billion range. The cost to manufacture the 7E7 was also subject to great uncertainty On the one hand, engineers were challenged to build a mid-size aircraft with long-range capabilities. The engineering design to achieve this could push building costs up significantly. Conversely, if succeeded in using composite materials, which required a fraction of the normal assembly time, then construction costs would be lower. Consistent with Boeing’s history, the base case assumes 80 percent as the percentage of cost of goods sold to sales. As shown in Exhibit 9, however, the IRR of the 7E7 was very sensitive to keeping production costs low
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