In 1990 Boeing was supposed to introduce the 777, at the time the world's largest and longest-range twin-body jet. The 777 would serve medium- and long-haul markets such as the growing Asian market. Boeing's main competitors, Airbus Industries and McDonnell Douglas, had already announced plans to produce airliners that would compete directly with the 777. Analysts believed that intense competition between manufacturers would drive down airline prices. line. Lower prices for planes would mean lower earnings. As CEO of Boeing, Frank Shrontz promised to increase earnings and return on equity. Boeing had a history of making money when its competitors did not, but Shrontz wanted higher returns. The airline industry has been characterized by large cash outflows for R&D and manufacturing, and long payback periods over long life cycles for each new airframe design. Companies had to have deep pockets to keep the operation going while waiting for a return on their investments. If Mr. Shrontz could increase Boeing's return on equity, it would increase the likelihood of Boeing's continued success well into the future. The 777 would be produced differently than previous Boeing planes. Various efforts would be undertaken to increase demand and reduce production costs of the 777 in an effort to create positive cash flows sooner. To boost demand, the 777 would be Boeing's first fly-by-wire airplane, a feature that Boeing's competitors have already added to their planes. Boeing has also made an effort to involve its large customers in the design process from the beginning, in an effort to increase its competitive advantage and long-term demand for the 777. As a cost-saving measure, the design teams and manufacturing would work together to create a detailed simulation of the manufacturing process that would reduce the cost of “improvements” often made during manufacturing, thus reducing the overall manufacturing cost. Additionally, Boeing would invest in more training for its engineers on the new CAD system. This new production process would lead to large capital outflows in the short term. The challenge for Shrontz is to determine whether these capital investments will lead to increased return on equity for Boeing. Problem 2: WACC = % Equity x Re + % Debt x Rd (1 - Tax Rate) Tax Rate: Tax Rate = 34%