The Dryden Press: Finance: Brigham

ISBN: 0-03-028931-9

Chapter 11 The Basics of Capital Budgeting

Debby Hopkins Tries to Reverse Boeing's Financial Tailspin

Boeing Co. has been struggling in recent years. In 1997, the 82-year-old company suffered its first loss in 50 years, and even though the overall market was rising, its stock fell from $60 a share to just under $30.
Boeing's troubles were not declining sales. In fact, sales doubled, from $23 billion in 1996 to more than $56 billion in 1998, as Boeing aggressively outbid its archrival Airbus for new business. However, Boeing's costs increased even faster than sales, and as a result, the company lost $178 million in 1997 and barely broke even in 1998.
Boeing has always had a strong engineering culture, but historically it paid little attention to financial performance. Managements could get away with such behavior in the past, but stockholders won't tolerate it today, as top-level firings at GM, IBM, and others attest. So, to turn things around, Boeing hired Debby Hopkins in December 1998 as the company's chief financial officer (CFO). She had previously starred as a vice-president at Unisys and as CFO for General Motors Europe.
Hopkins, who was hired just after her 44^th birthday, is Boeing's youngest senior executive and the company's highest-ranking woman. Known for her dynamic energy and strong communications skills, Hopkins quickly made her presence felt. She discovered that the company's accounting and financial practices were outmoded, making it hard to determine whether products were profitable. So, she immediately set out to devise better procedures for measuring and controlling costs.
After reviewing the company's $13 billion capital budget, Hopkins concluded that $2 billion of projects had little chance of ever being profitable, and another $1.6 billion were likely to only break even or generate modest profits at best. She developed a "value scorecard" and used it to help kill value-reducing projects and increase investments in profitable areas.
While everyone recognizes that it is difficult to improve overnight, analysts believe that Boeing is moving in the right direction. It is once again profitable, Hopkins has received considerable praise, and the stock price is up more than 30 percent from its 1998 low.
Hopkins emphasized many of the techniques discussed in this chapter. In the future, each of Boeing's investment decisions will be based on a careful capital budgeting analysis. As you read this chapter, think about how Boeing, or any other company, could use capital budgeting analysis to make better investment decisions.

DISCUSSION QUESTIONS

This chapter addresses the idea of making intelligent investment decisions. Must investment decisions refer to tangible assets? What other kinds of assets can investment decisions involve? Try to give possible examples.
From an economic standpoint, why should sound investment decision-making be of primal importance to a firm?

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