• 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

• Don’t 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

Year | 1967 | 1968 | 1969 | 1970 | 1971 | 1972 | 1973 | 1974 | 1975 | 1976 | 1977 |

Pre Prod. | -100 | -200 | -200 | -200 | -200 | | | | | | |

Costs | | | | | -490 | -490 | -490 | -490 | -490 | -490 | |

Dep. | | | | 140 | 140 | 140 | 140 | 140 | 140 | | |

Revs. | | | | | | 420 | 420 | 420 | 420 | 420 | 420 |

Total Cash Flow | -100 | -200 | -200 | -60 | -550 | 70 | 70 | 70 | 70 | -70 | 420 |

NPV = - $584

Due to learning curve average unit cost reduces as production increases

Units Sold | Average Unit Cost | Accounting Profit | NPV |

323 | $12.25 | $311 | -195 |

400 | $12.00 | $700 | -$12 |

400 | $11.75 | $800 | $42 |

500 | $11.00 | $1,600 | $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.

n $16M - $12.5M = $3.5M per plane

n $3.5M´275 = $962M profit versus $960M in actual development costs known in 1970

n This more realistic breakeven level announced subsequent to the guarantees being granted.

n NPV breakeven approximately 400 planes

n Total free world market demand for wide-body aircraft approximately 325 planes

n Optimistic estimate: total demand 775 and 40% of that is 310

n Lockheed share price

n $64 Jan 1967 drops to $11 Jan 1971

n ($64-$11)(11.3 Million shares)=-$599 Million

n Compare to -$584 Million NPV

Here we can again see that NPV of a project has direct impact on shareprices equal to the amount of NPV.

## 1 comment:

your blog is feel good......Post a Comment