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

         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      Accounting breakeven approximately 275 planes

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:

To Visit My said...

your blog is feel good......