Lockerheed Tristar Case Study
Lockerheed tristar case study
Executive Summary
Professor Gupta, many organizations use financial methods to determine the viability of projects and decisions based in the initial required investment. The financial industry has many standards regarding these methods, with the most commonly used being Internal Rate of Return (IRR) and Net Present Value (NPV). Each method encompasses positives and negatives; however if either are used without fully understanding what their prospective results reveal, mistakes can be made and under-estimations of return will happen. In a recent case Lockheed Martin chose to use the Internal Rate of Return to value their Tri Star project. We have determined this to be a mistake and, through this case analysis, will show where the mistake happened. We also intend to explain how using the Net Present Value method will uncover a different, more realistic picture of the project’s return.
Introduction/Motivation
Capital investment decisions are long term finance decisions designed to strategically invest in projects that will improve the value of the corporation for stockholders. There are several methods for determining which projects are worth investing in, but the best methods must take into account the net present value of the future cash flows resulting from the investment using an appropriate discount rate for the project and managements assessment of the risk involved. In the Lockheed case, which we will examine in detail below, the management made a decision to proceed with the Tri Star project based on a break-even analysis. As we will show, their analysis was flawed, failing to take into account the net present value of their investments resulting in a huge loss of value for the company.
Data/Analysis Section
In breaking out the data as referenced in the Harvard Business case study from the Lockheed Tri-Star situation, organizing the cash flows in a spreadsheet depiction offered the most clarity in analyzing
Executive Summary
Professor Gupta, many organizations use financial methods to determine the viability of projects and decisions based in the initial required investment. The financial industry has many standards regarding these methods, with the most commonly used being Internal Rate of Return (IRR) and Net Present Value (NPV). Each method encompasses positives and negatives; however if either are used without fully understanding what their prospective results reveal, mistakes can be made and under-estimations of return will happen. In a recent case Lockheed Martin chose to use the Internal Rate of Return to value their Tri Star project. We have determined this to be a mistake and, through this case analysis, will show where the mistake happened. We also intend to explain how using the Net Present Value method will uncover a different, more realistic picture of the project’s return.
Introduction/Motivation
Capital investment decisions are long term finance decisions designed to strategically invest in projects that will improve the value of the corporation for stockholders. There are several methods for determining which projects are worth investing in, but the best methods must take into account the net present value of the future cash flows resulting from the investment using an appropriate discount rate for the project and managements assessment of the risk involved. In the Lockheed case, which we will examine in detail below, the management made a decision to proceed with the Tri Star project based on a break-even analysis. As we will show, their analysis was flawed, failing to take into account the net present value of their investments resulting in a huge loss of value for the company.
Data/Analysis Section
In breaking out the data as referenced in the Harvard Business case study from the Lockheed Tri-Star situation, organizing the cash flows in a spreadsheet depiction offered the most clarity in analyzing