Lockheed L1011 Case Study, a Recommendation
To: The Board of Directors
From: David F. Akin, Esq.
RE: Recommendation Regarding the Tri Start Wide-body Aircraft Project
Date: 1971 early 72ish
Recommendation:
The L-1011 project should be canceled.
Cancelling the L-1011 project will increase shareholder value by $161.92 per share.
Excluding preproduction sunk costs, including a cost of capital 16%, and sales of 113 units and a per unit sales price of $16 million, the net present value (NPV) of continuing with the Tri Star is -$ 1,829,666,246.
Rationale for Decision:
Our original sales expectations were based on the assumption that we would capture 35% to 40% of the large body market. We further projected air travel growth of 10%. This would result in a potential market of 270 to 310 aircraft for our company. A more recent projection is a 5% growth rate in air travel or 323 aircraft. Assuming the Tri Star could capture 35%, we would expect sales of only 113 aircraft.
Definition of Problem
Lockheed’s stock value has plummeted to the point that the company’s survival is threatened. Recent $480 million losses on the C5-A, Cheyenne helicopter, the SRAM and nine Navy ship contracts and delays in getting the L-1011to market have created a negative cash flow. Based on more realistic projections of Tri Star sales, even with additional loan guarantees we would be borrowing to lose more money.
This leaves us with three options:
Do nothing and hope for the market for large body aircraft to accelerate rapidly and assume that the Fed will bail us out if it does not. This would also require Rolls Royce to get financing to meet its obligations to us on engine production at no additional cost to Lockheed. While it is hard to ignore the $900 million invested in preproduction costs, the economic, travel and political climate has changed dramatically. Doing nothing is no option.
Another option is to look for a military opportunity for refueling planes as was seen with the needs of the
From: David F. Akin, Esq.
RE: Recommendation Regarding the Tri Start Wide-body Aircraft Project
Date: 1971 early 72ish
Recommendation:
The L-1011 project should be canceled.
Cancelling the L-1011 project will increase shareholder value by $161.92 per share.
Excluding preproduction sunk costs, including a cost of capital 16%, and sales of 113 units and a per unit sales price of $16 million, the net present value (NPV) of continuing with the Tri Star is -$ 1,829,666,246.
Rationale for Decision:
Our original sales expectations were based on the assumption that we would capture 35% to 40% of the large body market. We further projected air travel growth of 10%. This would result in a potential market of 270 to 310 aircraft for our company. A more recent projection is a 5% growth rate in air travel or 323 aircraft. Assuming the Tri Star could capture 35%, we would expect sales of only 113 aircraft.
Definition of Problem
Lockheed’s stock value has plummeted to the point that the company’s survival is threatened. Recent $480 million losses on the C5-A, Cheyenne helicopter, the SRAM and nine Navy ship contracts and delays in getting the L-1011to market have created a negative cash flow. Based on more realistic projections of Tri Star sales, even with additional loan guarantees we would be borrowing to lose more money.
This leaves us with three options:
Do nothing and hope for the market for large body aircraft to accelerate rapidly and assume that the Fed will bail us out if it does not. This would also require Rolls Royce to get financing to meet its obligations to us on engine production at no additional cost to Lockheed. While it is hard to ignore the $900 million invested in preproduction costs, the economic, travel and political climate has changed dramatically. Doing nothing is no option.
Another option is to look for a military opportunity for refueling planes as was seen with the needs of the