Lockheed Tri Star Investment Analysis

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Introduction In 1971, the American firm Lockheed undertook the necessary legislative and financial steps to secure production/assimilation of the L-1011 Tri Star Airbus for future commercial flight implementation. The L-1011 Tri Star Airbus was a direct competitor to the DC-10 trijet and the A-300B airbus; it was designed as a wide-bodied commercial jet with capacity for 400 passengers. While Lockheed representatives claimed that the project was financially sound, there were others who doubted the ability for the Tri Star Airbus endeavor to recover costs. The center of the debate was over the estimated break-even sales that the Airbus would require to recover its initial cash outflows. However, Lockheed testified that the number of units they were contracted to sell (including option-to-buy) would well recover the production costs and the Airbus would be an economically viable project for commercial jet production. Problem Definition The main doubt here is the sales volume needed to achieve a break-even sale figure. While the Airbus production line had solid numbers in that their revenue per unit exceeded the cost per unit, the cash inflows from the sales were spaced out over the production time period. Considering the time value of money and the generous discount rate of 10%, the cash inflows in terms of net present value may be lower than expected; thus, the overall benefit of the project may not be commercially viable. Also, with the unrealistic estimation of future growth in global demand for commercial jets, the guarantee of selling such a high number of Airbus’ units is doubtful. Finally, the actual sales figures is tantamount to determining share price and the overall effect of revenue on the shareholders. Company Objectives Lockheed is pushing to achieve more than just a break-even figure for the Airbus – they wish to exceed the break-even

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