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Lockheed

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Memo
Recommendation
I recommend that the investment decision made by Lockheed to embark on the Tri Star program was unreasonable. According to my analysis, the company could have terminated this project and invested its capital in a more profitable investment. Eventually, this poor decision resulted in dramatic loss of wealth for the Lockheed shareholders totaling a loss of $766 million in stock value.

Rationale for Decision
The Lockheed case illustrates the significance of NPV analysis in Capital Budgeting.
Using discount rate of 10% in the given the scenario and with the project volume of 210 aircrafts, I found the NPV to be -$584 million. This was definitely an unacceptable NPV. The revised break-even analysis by Lockheed revealed that the project reached economic break-even with the production of 275 aircrafts at $12.5 million per unit. But as per my analysis, the break-even at this level of the production was not attained. Despite industry analysts predicting 300 units as Lockheed’s break-even sales point, the net present value remained insufficient to cover costs at negative $274 million. Source | Estimated Production
Aircrafts (in units) | Estimated cost per Aircraft (in $ million) | NPV at r=10%
(in $ million) | Lockheed | 210 | 14.00 | (584) | Lockheed | 275 | 12.50 | (312) | Industry Analysts | 300 | 12.50 | (274) | Actual Break-Even | 400 | 11.75 | 42 | Projection | 500 | 11.00 | 441 |

I found that Tri-Star will have to produce roughly 400 aircrafts costing between $11.75 million to $12 million per unit to reach the break-even value. The NPV at this

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