Week5

Wright Aircraft, Inc. Wright Aircraft is the global leading builder of long-haul jet aircraft for civilian aviation. Management expects the company to maintain its leadership for the foreseeable future. Wright is considering two projects to develop an improved engine control system to to improve fuel utilization (an important factor in airlines' aircraft purchase decisions). Cash flows due only to sales of the new system are included in Chapter 2. (Assume the projections reasonably reflect the facts of the case.) Project Lindbergh utilizes a revolutionary technology to increase fuel utilization 15%. Project Lindbergh's system can be used on all airline aircraft, whether purchased from Wright or its competitors, and on Wright's next product generation. Project Post utilizes an existing technology that promises to increase fuel utilization 5%. Project Post's system can be used on Wright aircraft only. What discount rate should you use for each project? Why? What decision should Wright's management make? Why? Project Lindbergh (000s of $s) Chapter 1: R&D Phase Chapter 2: Launch and Commercialization Year 1 2 3 4 5 6 7 8 ($7,500) ($6,000) ($3,500) ($1,500) $60,000 $125,000 $175,000 $235,000 Probability of Techical Success Stage Gate 1 - End of Year 2 35% Satge Gate 2 - End of Year 4 55% Discount Rate 25% because of the commercial risk of new system Outcomes Net Present Value Probability Fails at Stage Gate 1 ($9,840) 65% ($6,396) Fails at Stage Gate 2 ($12,246) 16% ($1,929) Launch $116,309 19% $22,389 Total 100% $14,065 Project Post (000s of $s) Chapter 1 Cash Flows Chapter 2: Launch and Commercialization