Corporate Finance Slot 5 - Quiz 2 Date: February 11, 2011 Maximum

ime: !0 minute"
Instruction: Show detailed work to obtain proper credit
In January 2007, Boeing was contemplating the development of a small unmanned aerial
vehicle (UA! that had a num"er of possi"le applications, including monitoring of electrical
transmission lines, pipeline safety, forest health and "order security#
But the UA development critically depended on advances in technologies related to
aviation control systems, remote sensing and glo"al positioning# $ence, the immediate
outlay for the UA pro%ect was &'( million for )*+ to achieve engineering "rea,throughs in
the ,ey technologies# -he )*+ pro%ect was e.pected to ta,e up to two years# -hey were
willing to a"andon the pro%ect if the )*+ outcome failed to deliver the critical "rea,/through
re0uired to develop a superior product#
1ontingent on the success of the )*+ e2orts at the end of two years, Boeing was e.pected
to spend &32( million to launch the product# -his one/time outlay was re0uired for the UA
design, testing and manufacturing facility "uilding#
Boeing was not alone in the race for the new UA, in fact, all the ma%or aircraft manufactures
were "elieved to "e developing similar UAs# -he estimates of post/ta. operating cash 4ows
net of wor,ing capital investments, from sales of UAs under di2erent product/mar,et
scenarios "ased on the information availa"le in January 2007were as follows# -he 5.ed
assets would "e fully depreciated and no salvage value was e.pected at the end of the
pro%ect6
#ear 1 2 ! $ 5 % & ' (
7ptimistic 0 0 80 ''9 '(3 '77 223 298 3':
;ost <i,ely 0 0 (2 92 7: 77 8= '0: '22
>essimistic 0 0 20 23 2: '8 20 20 22
De"cription o) t*e "cenario":
7ptimistic ('0? pro"a"ility! 6 @uperior product, sales growth 2(? per annum#
;ost li,ely (80? pro"a"ility! 6 Average product, moderate competition, sales growth
appro.imately a"out '(? per annum#
>essimistic ('0? pro"a"ility! 6 Average product, "ut severe competition limits sales
growth to a"out (? per annum#
-he operating cash 4ows and investments were su"%ect to ris, and the appropriate
discounting rate was considered to "e '(?# BoeingAs management recogniBed that "y the
time the )*+ outcome is ,nown, it would have signi5cant clarity a"out the demand scenario
that would follow for its UAs (from among the three pro%ected scenarios!# Boeing had
already spent &' million for mar,et research on the product#
Que"tion"6
'# Chat is the e.pected D> of the UA pro%ect "ased on information availa"le to
Boeing as of January 2007, assuming no a"andonmentE @hould Boeing underta,e the
launch of the UA "y investing &32(m "ased on this analysisE /&7#:'
2# Fiven the willingness to a"andon the UA pro%ect at the end of two years, estimate
the D> of the pro%ect as of January 2007# @hould Boeing underta,e the development
of the UA "ased on the estimateE &'3#8( GH@
3# Chat is the worst case loss for Boeing from the UA pro%ect with a"andonmentE /&'(
:# Hstimate the incremental value created "y the 4e.i"ility to a"andon the UA pro%ect
at the end of two years, compared to the development and launch of UA as a
commitment (give your calculations!#