Lockheed Summary
Investment Analysis and Lockheed Tri Star
Key facts * 1971 ,company found itself in congressional hearing seeking a $250 million to secure bank credit required for completion of the L-1011 tri star program
COSTS * Pre-production i.e. from 1967 to 1971 estimated cost $900 million, * From 1972-1977 the total plans delivered was 210. * The average unit production cost per aircraft would be about $14 million. Inventory intensive production costs would be $490 million.
(35 aircrafts per year and $14 million per aircraft)
REVENUES * Expected price to be received for the L-1011 tri star was about $16 million per air craft in 1968. * At the end of year 1972-1977, annual revenues of $560 million can be assumed to occur in six equal increments. * Roughly 0.25 of the price of the aircraft was received in 2 years advance. * So 35 aircrafts built in a year, $140 million of the $560 million in total annual revenue is actually received as a cash flow in two year advance. * So net revenue = $560-$140 = $420 on delivery time.
DESCOUNT RATE * The cost of capital applicable to Lockheed’s assets, Discount rate was in the range 9%-10%.
BREAK-EVEN REVISITED * After receiving government loan guarantees Lockheed revised its break even sales volume: * Lockheed claims that it can get back its development costs about $960 million and start making profit by selling 275 tri star * They had estimated 300 units to be break even volume and production cost at these levels would average only about $12.5 million per unit instead of $14 million. * Lockheed’s share price plummeted from a high of about $70 to around
Key facts * 1971 ,company found itself in congressional hearing seeking a $250 million to secure bank credit required for completion of the L-1011 tri star program
COSTS * Pre-production i.e. from 1967 to 1971 estimated cost $900 million, * From 1972-1977 the total plans delivered was 210. * The average unit production cost per aircraft would be about $14 million. Inventory intensive production costs would be $490 million.
(35 aircrafts per year and $14 million per aircraft)
REVENUES * Expected price to be received for the L-1011 tri star was about $16 million per air craft in 1968. * At the end of year 1972-1977, annual revenues of $560 million can be assumed to occur in six equal increments. * Roughly 0.25 of the price of the aircraft was received in 2 years advance. * So 35 aircrafts built in a year, $140 million of the $560 million in total annual revenue is actually received as a cash flow in two year advance. * So net revenue = $560-$140 = $420 on delivery time.
DESCOUNT RATE * The cost of capital applicable to Lockheed’s assets, Discount rate was in the range 9%-10%.
BREAK-EVEN REVISITED * After receiving government loan guarantees Lockheed revised its break even sales volume: * Lockheed claims that it can get back its development costs about $960 million and start making profit by selling 275 tri star * They had estimated 300 units to be break even volume and production cost at these levels would average only about $12.5 million per unit instead of $14 million. * Lockheed’s share price plummeted from a high of about $70 to around