Boeing has two capital budgeting projects under consideration. The first is for
ID: 2743195 • Letter: B
Question
Boeing has two capital budgeting projects under consideration. The first is for the replacement of a fleet of aircraft tugs, which are used to move airplanes around after they are manufactured and have a life expectancy of 5 years. The second is for the production of a new model of aircraft, which will have a 3-year development phase followed by estimated production run of approximately 15 years. Would accurate capital budgeting results be more easily obtained for one these projects or would both be equally difficult? Explain in detail.
Explanation / Answer
2nd project is easier from capital budgeting point of view. In the first project, to determine cash flows, we need to compare the new project with the old one and find the incremental cash flows whereas in the second project no such comparison is required. It follows a traditional cash flow mechanism wherein, there is cash outflows in beginning of the project and there will be cash inflows in the subsequent years.