Lockheed Tri Star Case Study
Lockheed Tri Star Case Study
Introduction
By 1966, Lockheed had already invested almost $900 million in research and development of the Tri Star L-1011 (Scott, 2010). By 1971, with over $1 billion in sunk costs, Lockheed was seeking a $250 million federal guarantee through a congressional hearing in order to complete the program. Lockheed presented their case as a liquidity issue caused by unrelated military contracts and assured that the Tri Star program was economically sound (text).
Through net present value (NPV) calculations, break even breakdowns, and shareholder stock analysis based on a sales volume of 210 aircraft; this case study identifies flaws in the initial proposals presented by Lockheed in 1971. Financial Analysis including tables, graphs and other Analysis
Table 1: Cash flow an NVP analysis
Net present value of this project is just over -$584 million
Table 2: Present Value factors and new present value based on varying discount rates
Chart 3: NPV vs. Discount Rate
Table 2: Breakeven analysis
Results and Analysis (and value added questions)
In 1971 Lockheed estimated a breakeven point somewhere between 195 and 205 aircraft even though they had only received 103 solid orders. Based on the numbers seen in table 3, at a unit price of $14 million the breakeven point is well beyond those numbers. With a production price of $12.5 million, as seen with 300 orders, NPV would be -$312.68 million. This does not reflect a breakeven point. Based on my calculations (also seen in table 3) the breakeven point at this production cost is closer to 480 units, a number more than twice predicted sales numbers.
The Tri Star program never actually reached the economic break-even point. The actual break-even point would be between 313 and 500 units based on a unit price between $11 million and $12.5 million.
The decision to pursue the Tri Star project was not reasonable. Based on the present value calculations in 1971, NPV was
Introduction
By 1966, Lockheed had already invested almost $900 million in research and development of the Tri Star L-1011 (Scott, 2010). By 1971, with over $1 billion in sunk costs, Lockheed was seeking a $250 million federal guarantee through a congressional hearing in order to complete the program. Lockheed presented their case as a liquidity issue caused by unrelated military contracts and assured that the Tri Star program was economically sound (text).
Through net present value (NPV) calculations, break even breakdowns, and shareholder stock analysis based on a sales volume of 210 aircraft; this case study identifies flaws in the initial proposals presented by Lockheed in 1971. Financial Analysis including tables, graphs and other Analysis
Table 1: Cash flow an NVP analysis
Net present value of this project is just over -$584 million
Table 2: Present Value factors and new present value based on varying discount rates
Chart 3: NPV vs. Discount Rate
Table 2: Breakeven analysis
Results and Analysis (and value added questions)
In 1971 Lockheed estimated a breakeven point somewhere between 195 and 205 aircraft even though they had only received 103 solid orders. Based on the numbers seen in table 3, at a unit price of $14 million the breakeven point is well beyond those numbers. With a production price of $12.5 million, as seen with 300 orders, NPV would be -$312.68 million. This does not reflect a breakeven point. Based on my calculations (also seen in table 3) the breakeven point at this production cost is closer to 480 units, a number more than twice predicted sales numbers.
The Tri Star program never actually reached the economic break-even point. The actual break-even point would be between 313 and 500 units based on a unit price between $11 million and $12.5 million.
The decision to pursue the Tri Star project was not reasonable. Based on the present value calculations in 1971, NPV was
References: 1. Aviastar: “Lockheed L-1011 Tri Star” Retrieved from: http://www.aviastar.org/air/usa/lok_tristar.php 2. Lockheed Martin (LMT) Stock price. Retrieved from: http://www.advfn.com/p.php?pid=qkquote&symbol=NY%5ELMT 3. Reinhardt, U.E. “Break-Evan Analysis for Lockheed’s Tri-Star – An Application of Financial Theory.” The Journal of Finance. SEPT 1973. Retrieved from: http://www.estg.ipleiria.pt/files/350738_BREAKEVE_4628e59997e2a.pdf 4. Scott, Giordano, Granfield, Ibrahim, Ikpeazu and Sanchez. “Lockheed Tri Star Case Study” 18 October, 2010.