...LOCKHEED TRI STAR Analysis & Recommendations Toby Odenheim 10‐OCT‐2013 Executive Summary With the L-1011 Tri Star program, Lockheed, well respected for military aircraft contracts, started to move into the civilian commercial aviation sector in direct competition with Airbus, McDonnell Douglas and Boeing. By 1971, having already invested $700 million in development costs, Lockheed was struggling with cash flow and sought $250 Million in federal loan guarantees, funding which was needed to complete development. Despite Lockheed’s assertion to the contrary, NPV analysis demonstrates that the project was never financially viable. However, given the sunk costs, Lockheed’s best option is to continue with production to minimize the project loss. Continuing to production yields an expected NPV loss of $584 million (assuming estimated sales of 210 aircraft) versus a loss of $900 million if production is scrapped outright. Recommendations: Secure the needed $250 million in funding to complete R&D and move into production. Pursue every option possible to boost total sales, including o Adding an option to lease the aircraft rather than purchase outright. This could help more customers afford the L-1011 thereby driving up sales on reducing unit production costs. o Pursue possible sale of the L-1011 to military and (international) government buyers, rather than focuses exclusively on the commercial market. o Attempt to voluntarily...
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...LOCKHEED TRI STAR CASE STUDY 10/18/2010 Group #8 Case Write-Up Lockheed Tri Star Case Study EXECUTIVE SUMMARY Although highly regarded by the military, Lockheed sought to move into the lucrative civilian commercial aviation sector and compete with Boeing, McDonnell Douglas and Airbus. Lockheed began design and testing in 1966 on their entry, the “Tri Star”, which boasted a range of over 6,000 miles with nearly 400 passengers and speeds of close to 600 mph. They had already invested nearly $900 million in development costs. Carried by state of the art Rolls Royce turbofan engines, the L-1011 was by all accounts, a technological winner and might be the company’s ticket back to solvency. The summer of 1971 found the once formidable company on the brink of disaster. Despite the nearly a $1 billion in sunk costs, Lockheed was in need of $250 million more to bring the plane to market, but its bankers would not commit without federal loan guarantees. Spokespersons for Lockheed claimed before Congress that the Tri-Star program was economically sound and that their problem was mere liquidity crisis. However, opposition to the guarantee focused on estimated break-even sales – the number of jets that would need to be sold for total revenue to cover all accumulated costs. This case illustrates the importance of NPV analysis in capital budgeting. We examined the decision to invest in the Tri-Star project by forecasting the cash flow associated with the project...
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...Case study: Investment Analysis and Lockheed Tri Star MGMTS-2700 Professor Hamza Abdurezak Harvard University Yang Zhon 1> A. Payback, NPV, IRR, Should purchase or not? Payback: $35,000/5000=7 year NPV: =Co+ C1…..n/(1+i)^1….n Co=-3,5000 CF1-CF15= 5,000; I= 12 Computing result is $-945.67 IRR: 11.49% NPV is negative and IRR is lower 12% so reject the proposal. B. NPV: =Co+ C1…..n/(1+i)^1….n NPV= -35000+(4500/.12) =2500 NPV is positive so should purchase the machine. C. NPV: =Co+ C1…..n/(1+i)^1….n = -35,000(4000/(0.12-0.04)) =-35,000+50,000 =15,000 NPV is positive so rainbow should reinvest the cost saving into the machine annually. 2. Cash Flow: Investment Y1 Y2 Y3 IRR NPV@15% 1. -75k44k44k44k34.63% 25,461.91 2. -50k23k23k23k18.01% 2,514.18 3. -125k70k70k 70k 31.21%34,825.76 4. - 1k12k13k14k1207.06%28,469.88 5. -125k67k67k 67k28.10% 27,976.08 1,Using IRR I recommend the (4) 2, Using NPV I recommend the proposal (3) 3,NPV is better! The NPV method is better because it shows the most cash flow as the highest. Because the discount rate is 15%, it is building a new both is prioritized higher. 4. 1, NPV=PV-Investment =210k-110k=100k 2. Assuming issue N shares when price is P. N*P=110,000(1) P=1,210,000/(10,000+N) (2) Then computing the result So N=1000 P=$110 3, Stock price rises up $10 Stock holder make the profit. Out cash flow in cash flownet cash flow 1967-100-100 1968-200-200 1969-200-200 1970-200140...
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...------------------------------------------------- Memorandum From: Maureen Farrell-JacobsR e: Lockheed L-1011 Tri-Star Case Study Part 1: Recommendation Proceed to obtain the $250 million in federal loan guarantees to complete the L-1011 Tri Star program. Seek military aircraft contracts in addition to the civilian aircraft contracts thereby spreading the risk into Lockheed’s well-established military market rather than exclusively into the commercial aircraft market. By making the above changes, Lockheed will potentially yield a NPV of $149.85 million using a 13% required rate of return at 500 units of production sold to both commercial and military markets versus the other end of the spectrum a NPV $-196.31 million in loss using 10% require rate of return at 300 units of production sold exclusively to commercial markets. In addition, Lockheed’s Stock Price will benefit by the turnaround of dog capital project in terms of cash flow to a star capital project in terms of increased cash flow providing all other Lockheed capital projects remain stable. A dog in terms of cash flow has both low growth and low market share versus a star that has high cash flow growth and high market share. Part 2: Rationale for Decision As Lockheed is looking to secure the $250 million in federal loan guarantees to complete the L-1011 Tri Star program having already incurred $960 million in sunk preproduction costs and is experiencing cash flow problems. The decision to move forward...
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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...
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...2013 Lockheed TriStar Case Study Group 6 Leon Krolikowski Sitaram Koppaka Brian Manning Tushar Mahajan Ryan Maggiorini Nicholas Manning UNIVERSITY OF MASSACHUSSETS SUMMER 2013 SCH MGMT 640 PROFESSOR RAJ GUPTA Table of Contents Executive Summary 2 Introduction/Motivation 3 Data Analysis and Results 4 Conclusion 8 Appendix 9 References 10 Executive Summary Lockheed’s L-1011 Tri Star Airbus program was a long-term, capital-intensive endeavor projected to strongly position Lockheed to compete in the commercial aircraft market. The initial preproduction investments for the program were made in 1967, with continued investments occurring during the subsequent four years, until the program commenced production in 1972. However, during the intervening period, initial program assumptions began to unravel, and Lockheed, which was also a major contractor to the United States Department of Defense, was before Congress, requesting a $250 million bank loan guarantee to complete the L-1011 program. By 1971, over 80% of Lockheed’s market capitalization had already been lost. During the ensuing debate that followed, it appeared that Lockheed had not taken due diligence in the planning for the project, and that initial unit sales and revenue estimates would fall woefully short of being what Lockheed’s CEO termed as a “commercially viable endeavor”. As the continued difficulties of the program unfolded before the public and the investment community, it...
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...Lockheed Tristar (1) Should Lockheed have pursued the Tri Star project in 1967? What are the main concerns with their analysis of the project? There are multiple different factors to look at when deciding if Lockheed should have pursued the Tri Star project in 1967. There are 6 techniques that are generally applied to assist in this decision: Internal Rate of Return (IRR), Net Present Value (NPV), Payback Method, Discounted Payback Method, Accounting Rate of Return, and Profitability Index. The most frequently used alternative capital budget methods, IRR, NPV and Payback Method, were used to evaluate this project. The Payback Method is not a useful method in its own right, but may have been unwisely used by Lockheed management in deciding on the Tri Star project, and so is discussed here. Based upon Lockheed’s numbers at 210 units (see Table A attached), the resulting NPV of the net generated cash flows is -$584 million and the corresponding IRR is -9.09%. Considering the 10% discount rate is optimistic, the actual results could be worse. The Payback Period calculation shows the project does not achieve payback in the project’s lifetime even on a pure accounting basis. There are several flaws in Lockheed’s initial analysis of the project, besides failing to properly discount cash flows to present: too optimistic projections of sales potential (estimating capture of 35-40% of the market); highly generous discount rate at 10% (considering the risk); highly optimistic growth...
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...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...
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...Memorandum for Lockheed’s L1011 Tristar Project Recommendation In 1967, Lockheed Corp., the American aerospace company that monopolized the military market for aircrafts, set out to compete in the commercial sector by replacing the Boeing 747 and the McDonnell Douglas DC-10. Lockheed invested tremendous resources into the Tristar thereby jeopardizing the entire corporation’s well-being on this singular project. Tristar distinguished itself from other aircrafts of its kind thanks to the highly-efficient, formidable Rolls-Royce RB211 engine that the L1011 would need to be constructed. In fact, this very engine, due to Rolls-Royce’s technical difficulties, created diminished sales because of its two year delay in production. My recommendation is that, Lockheed approach their Tristar project more peripherally while still remaining heavily anchored in military production and sales in order to offset cost and diminish the 35 target Tristar airplanes needed to break even. Rationale The reason for Lockheed having this approach is because by doing this Lockheed would be able to decrease the number of planes it would have to sell in order for it to have a positive NPV. Lockheed was put into this position because they started putting out their projections and asking for a loan before they had even secured a deal for their engine from Rolls Royce. Rolls Royce was in such disarray, that they were placed into receivership, and had to be resold to Rolls Royce Ltd. in order...
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...Lockheed Tri Star and Capital Budgeting Andrea Cunha D’ Arruda Financial Decision Making University of California San Diego – Extension Prof. George A. Haloulakos, CFA Executive Summary The commercial jet aircraft business is cyclical, and in need of huge amount of cash to invest and reinvest on its technology. During the 50’s Boeing, Airbus, and Lockheed were in a great competition for market share of the commercial and military aircraft market. This case illustrates the importance of NPV analysis in capital budgeting and the need of identification of competitive advantage with synergy with successful jet aircraft programs with new programs that can generate very large cash flows. The Lockheed TriStar Jet is a medium-to-long range wide-body trijet airliner and was the third to enter commercial operations, after Boeing 747 and DC-10. The program faced various issues during its operation, as the utilization of only one jet engine supplier (Rolls Royce), low estimated required rate of return 10%, and a misjudge of the break-even point of 210 aircrafts, that it is going to be shown on this analyzes that even with 300 aircrafts sold the project do not reach the break-even point. It is recommended by this study that the company need to embrace a business strategy of two end user, instead of only one, to the L1011 program. Concentrating only on the commercial market is not viable, but having the military market as a background of funds and positive cash flow can leverage...
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...1. a) Payback Period= Investment/Cash Flow per Year = 35,000/5000 = 7 year Computation of NPV: NPV= C0 + PV [PV= C0 + Σi=1t Ct/(1+r)t] =C0 +C[1/r – 1/r(1+r)t] = -35,000+ 5000[1/.12 - 1/.12(1+.12)15] = -35,000 + 5000[1/.12 – 1/.657] = -35,000 + (5000 * 6.81) = -945.68 i.e. $ -945.68 Computation of IRR: 0= -35,000 + Σ t i=1 5000/(1+IRR)t = 11.49% Rainbow Products should not purchase the machine because it is not profitable whether you utilize the NPV method or the IRR method. By NPV method, project should be rejected because it has a negative NPV of $945.68. By IRR method, the project should be rejected because the IRR is less than cost of capital for the investment. 1.b) The Perpetuity formula to calculate PV = Cash Flow per Year/Cost of Capital PV=C/r = 4500/.12 = $ 37,500. NPV= PV – Initial investment = 37,500 – 35,000 = $ 2500 Rainbow Products should purchase this machine with the service contract because it will produce a cash flow of $ 4500 which will make the NPV $ 2500. 1.c) V= C/(k-g) = 4000/(.12-.04) = $ 50,000 Therefore NPV = 50,000 - 35,000 = $ 15,000 Rainbows Products should invest in this project because 20% reinvestment and 4% growth rate will produce a NPV of $ 15,000. 2. Project | Investment | Year 1 | Year 2 | Year 3 | NPV@15% | IRR | 1.Add a New Window | -75000 | 44000 | 44000 | 44000 | 25461.91 | 34.62 | 2.Update Existing Equipment | -50000 | 23000 | 23000 | 23000...
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...Instructor Guide CORPORATE FINANCE COURSE NUMBER: MBA591 [pic] Jones International University®, Ltd. 1.800.811.JONES (5663) http://www.jonesinternational.edu ©2008 Jones International University®, Ltd. All rights reserved. 9697 East Mineral Avenue, Englewood, Colorado 80112, USA This workbook and all accompanying audio-visual material, manuals and software (collectively, the "Materials") are copyrighted with all rights reserved. Under the copyright laws, none of the Materials may be copied in whole or in part without prior written consent of Jones International University®, Ltd. (JIU™) You may permanently transfer all of your rights in the Materials, provided that you retain no copies, and provided that you transfer all of the Materials (including all component parts, media, documentation and any prior versions and upgrades). You may not copy or allow any copies of the Materials to be made for others, whether or not you charge anyone else for the copies. Limitation of Liability. JIU™ PROVIDES ALL OF THE MATERIALS “AS IS” WITHOUT WARRANTY OF ANY KIND. EACH OF JIU AND ALL ITS DEVELOPERS, TEACHING FACULTY, DIRECTORS, OFFICERS, EMPLOYEES OR AFFILIATES DISCLAIM ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT WILL JIU OR ITS DEVELOPERS, TEACHING...
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...LEHMAN TRIKES: A STORY WITHIN A STORY Donald C. Looney, Black Hills State University CASE DESCRIPTION The primary subject matter of this case is strategic alliances. Secondary issues include business strategy, entrepreneurship and marketing. The case explores the dynamics of an alliance between Harley-Davidson and a small, entrepreneurial, niche market company, Lehman Trikes. CASE SYNOPSIS As the world was in the midst of a crippling recession, on July 22, 2008, Harley-Davidson unveiled the new Tri Glide three-wheeled motorcycle at the annual dealer meeting in Las Vegas. At the same meeting Lehman Trikes, a small but rapidly growing leading manufacturer of three-wheeled motorcycles, announced that it would be the exclusive supplier to Harley-Davidson of the Tri Glide. Ron Hutchinson, senior vice president of product development for Harley-Davidson said, “This is a big deal. The three-wheeled market is a market that we believe has been effectively underserved because it has been done in the aftermarket.” (Pitlick, Harley trikes to be built here, 2008) While the entrance of Harley-Davidson into the trike market would obviously legitimize and add enormous growth opportunities for the three-wheel segment of the motorcycle market, would it profoundly change Lehman’s environment and business model? Dan Patterson, then CEO of Lehman Trikes, would later cryptically write of the event in the 2008 Third Quarter Report, “We are truly pleased...
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...4. Customers 8 5. Ease of Entry/Exit 8 6. Technology/Innovation 9 7. Product Characteristics 10 A. Government 10 B. Commercial Aircraft 10 8. Scale Economies 11 A. Internal 11 B. External 12 9. Experience Curve Effects 12 10. Capacity Utilization 13 11. Industry Profitability 13 SIX FORCES OF COMPETITION 14 1. Threat of New Entrants 14 2. Bargaining Power of Suppliers 16 3. Bargaining Power of Buyers 16 4. Threat of Substitute Products/Services 17 5. Intensity of Rivalry among Competitors 17 6. Relative Power of other Stakeholders-Unions 18 COMPETITIVE POSITION OF MAJOR AEROSPACE COMPANIES 18 COMPETITOR ANALYSIS OF MAJOR AEROSPACE COMPANIES 20 Boeing Co. 20 Lockheed Martin Corporation 21 Northrop Grumman Corporation 23 Raytheon Co. 24 Other Manufacturers 25 Airbus 25 United Technologies 26 KEY SUCCESS FACTORS 26 Reducing Costs 26 Maintaining Access to Foreign Markets 27 INDUSTRY PROSPECTS AND OVERALL ATTRACTIVENESS 29 Factors Making the Industry Attractive 29 Factors Making the Industry Unattractive 31 Special Industry Problems and Issues 32 Profit Outlook 33 “Micro Jet” Airplanes 33 CONCLUSION 35 Works Cited 37 Appendix A. Aircraft Information Fixed-Wing Aircraft 38 INTRODUCTION The accomplishments and advancements in the aerospace manufacturing industry over the last century since the Wright Brothers made their first...
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...SEATTLE PACIFIC UNIVERSITY School of Business and Economics BUS 6220 CRN 43797 Office: McKenna Hall 205 Financial Analysis Phone: 281-3523 Dr. Herbert Kierulff Hours: Th. 1-6 and by appt. hkierulf@spu.edu Classroom: McKenna 111 "…value reflects only our opinions and not the true worth of the things themselves." Francisco de Osuna, Third Spiritual Alphabet COURSE OBJECTIVES: By the end of this course you should be able to demonstrate greater competence in: * Doing short and long term financial planning and budgeting, strategic analysis and decision making under conditions of rapid change and uncertainty. * Applying the fundamental and practical principles of valuation to pricing and to real investment opportunities. * Gathering information, separating relevant from irrelevant factors, selecting and evaluating relevant options with regard to their consequences, and selecting and defending a course of action. * Conceptualizing complex issues and reducing them to coherent written and oral statements. * Integrating valuation and investment analysis with the other functional areas of business administration including business processes and information technology. * Working effectively in group...
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