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Lockheed Memo

In: Business and Management

Submitted By richardtreynolds
Words 348
Pages 2
Rich Reynolds Financial Decision Making 8/17/10

To: Lockheed Investment Committee
From: Lockheed CFO
Date: August 18, 1965
Subject: Tri-Star Project

The purpose of this memo is to explain why my recommendation is to not approve the Tri-Star project, which would span over the period of 1967 through 1976. This project relating specifically to the L-1011 Aircraft would cause a considerable amount of stress on the company’s financial performance.
Below you will find the projected cash-flows for this project. These cash flows are based on current assumptions about the project.

The cumulative Net Cash-Flow at the end of 1976 is a -$480 million. This amount is based on actual cash and the time value of money has not been considered. It isn’t until 1972 that the project starts to produce a positive Net Cash Flow, after which, a Net of $1.1 million has already been spent.
Aside from the negative Net Cash Flow here are some additional reasons why this project is not in the best interest of the company. 1. The large amount of upfront investment in these aircrafts will leave the company vulnerable in the event the project doesn’t perform well. The company will feel more obligated to continue on with the project because of the large investment, even though terminating it mid-stream may be a better choice. 2. Almost 5 years will pass between the time of the initial investment and the first aircraft will be completed. This long period of time leaves the company exposed to changing market conditions and changes in the overall economy. 3. The break-even point for number of aircraft at 195-205 does not appear to be within reach based on current information. The company currently does not have enough contracts to secure the sale of this many aircraft and would need to rely on “future” orders to hit this target.

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