Financial Analysis of Lockheed TriStar Program Case Study

This case study analyzes the Lockheed TriStar program, focusing on its financial viability and capital budgeting decisions. The analysis addresses key questions, including the net present value (NPV) of the project at planned production levels, break-even points, and the required business volume for the program's success. It examines the impact of the learning curve on production costs and the potential for cost savings. The study concludes that the TriStar program was not a feasible investment, leading to significant financial losses. The analysis also highlights the company's misjudgment of the air travel industry's growth rate and its consequences on the company's share value. The document provides a detailed financial assessment of the TriStar program, its challenges, and the factors contributing to its ultimate failure.

Running head: LOCKHEED CASE 1
LOCKHEED CASE

LOCKHEED CASE 2
Contents
Question 1...................................................................................................................................................3
Question 2...................................................................................................................................................3
Question 3...................................................................................................................................................3
Question 4...................................................................................................................................................3
References...................................................................................................................................................5

LOCKHEED CASE 3
Question 1
At the planned units as determined are 210 units, the production levels, true value of the
Tri Star program was the net present value of the company is $584.05 at the rate of 10%. This
indicates the true levels of the project and the negative figure suggests that it would result in
losses for the company (Almazan, Chen & Titman, 2017).
Question 2
At the breakeven at 300 units, Lockheed was not having the breakeven in terms of the
value. When the calculations were conducted the true value of the project as it can be seen from
the table in the excel file at the production level was in negative figure at ($274.8) (Andor,
Mohanty & Toth, 2015).
Question 3
The business volume that is required by the Tri Star program is nearly 388 units. Due to
the presence of the learning curve, there were certain assumptions which were made with regards
to the additional savings of $7500 per unit that has been produced mainly and the main reason
behind it is the learning curve. When the company was operating at 300 units, the cost per unit
was nearly 12.5 million per unit. In this case, in the view of the analyst, they proposed that if the
Lockheed was able to manufacture and give 500 units. In this case the minimum cost would
stand at 11 million per aircraft (Lockheed, 2018). Yet when the total production is considered the
total units of 388, will be the breakeven analysis for the Tri Star program. This is the stage where
the program would reach to its true potential. Under this particular scenario the average cost per
unit stands at 11.84 and the production costs are identified by multiplying the units per year with
the cost per unit. Also the noteworthy thing here is that the net present value will be positive in
this scenario along with the discounting rate of 10% (Zore, et al 2018).
Question 4
However from the overall analysis it can be concluded that the investment proposal
considered by the Lockheed to adopt the Tri Star program was not a feasible one. Instead of the
profits the venture would result in a monetary loss of $584.05 million as well as the accounting

LOCKHEED CASE 4
loss of $480 million. Notwithstanding to this the major mistake committed by the company is to
insensibly estimate the growth rate of the air travel industry. Due to this one insignificant step
the shares of the Lockheed eventually saw a steep move from $70 to $3.26 per share. The total
amount of the loss that the Lockheed shareholders had to face was $754.28 million in wealth and
therefore it was one of the poorest decisions taken by the company (Shu, Zeithammer & Payne,
2016).

LOCKHEED CASE 5
References
Almazan, A., Chen, Z., & Titman, S. (2017). Firm Investment and Stakeholder Choices: A Top‐
Down Theory of Capital Budgeting. The Journal of Finance, 72(5), 2179-2228.
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central
and Eastern European firms. Emerging Markets Review, 23, 148-172.
Lockheed, (2018). CASE STUDY. Retrieved from
file:///C:/Users/System04087/Downloads/3378459_2003739083_Lockheedcase
%20(1).pdf
Shu, S. B., Zeithammer, R., & Payne, J. W. (2016). Consumer preferences for annuity attributes:
Beyond net present value. Journal of Marketing Research, 53(2), 240-262.
Zore, Ž., Čuček, L., Širovnik, D., Pintarič, Z. N., & Kravanja, Z. (2018). Maximizing the
sustainability net present value of renewable energy supply networks. Chemical
Engineering Research and Design, 131, 245-265.