• 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.
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