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HBS Case

The document summarizes an investment analysis case study of Lockheed's TriStar aircraft program from 1967-1977. It provides key details such as: 1) Pre-production costs of $900 million were incurred from 1967-1971 to deliver 210 planes from 1972-1977. 2) Revenues of $16 million per plane were earned, with 25% received 2 years in advance of delivery. 3) Production costs were $14 million per plane from 1971-1976, declining to $12.5 million at 300 planes. 4) The net present value of the program was initially calculated as negative $584 million.

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Ivani Bora
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397 views3 pages

HBS Case

The document summarizes an investment analysis case study of Lockheed's TriStar aircraft program from 1967-1977. It provides key details such as: 1) Pre-production costs of $900 million were incurred from 1967-1971 to deliver 210 planes from 1972-1977. 2) Revenues of $16 million per plane were earned, with 25% received 2 years in advance of delivery. 3) Production costs were $14 million per plane from 1971-1976, declining to $12.5 million at 300 planes. 4) The net present value of the program was initially calculated as negative $584 million.

Uploaded by

Ivani Bora
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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HBS case: Investment Analysis and Lockheed Tri Star

9-291-031 HBS : Investment Analysis and Lockheed Tri Star

Pre-production costs estimated at $900 million incurred between 1967 and 1971. Total of 210 planes delivered from 1972-1977 Revenues of $16 million per unit, 25% of revenue received 2 years in advance of delivery. Production costs of $14 million (at 210 units could decline to $12.5 million at 300) from 1971-1976. Discount rate of 10% per year. 210 planes (1972-1977) Planes per year = 210/6=35

Production Costs (1971-1976) 35($14M)=$490M per year Dont forget the preproduction costs of $900M

Revenues (1970-1977) Total Revenues 35($16M)=$560M per year Deposits=0.25($560M)=$140M (2 yrs in advance) Net Revenues=$560-$140=$420M on delivery 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 -200 -200 -200 -200

Year Pre Prod. Costs Dep. Revs. Total Cash Flow

1967 -100

140 -100 -200 -200 -60 =SUM(ABOVE)

-490 -490 -490 140 140 140 420 420 -550 70 70

-490 140 420 70

-490 -490 140 420 420 420 70 -70 420

NPV = - $584

Due to learning curve average unit cost reduces as production increases

Units Sold 323 400 400 500

Average Unit Cost $12.25 $12.00 $11.75 $11.00

Accounting Profit $311 $700 $800 $1,600

NPV

-195 -$12 $42 $441

In 1970 all investments are sunk cost and should not be included in calculating NPV so now considering caseflow = zero for year 1967,68 and 69 again calculate NPV and we get $ 18 million , so we have touched breakeven considering 67,68 and 69 investment as sunk cost.  Accounting breakeven approximately 275 planes  $16M - $12.5M = $3.5M per plane  $3.5Mv275 = $962M profit versus $960M in actual development costs known in 1970  This more realistic breakeven level announced subsequent to the guarantees being granted.  NPV breakeven approximately 400 planes  Total free world market demand for wide-body aircraft approximately 325 planes  Optimistic estimate: total demand 775 and 40% of that is 310  Lockheed share price  $64 Jan 1967 drops to $11 Jan 1971  ($64-$11)(11.3 Million shares)=-$599 Million

 Compare to -$584 Million NPV

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