Institute SIIB

Name Harika Reddy R

PRN 11020241041
LOCKHEED TRISTAR CASE STUDY ANSWER 1

Total Units 210

Number of units per year 35
Cost of production 14
Sale Price 16
Rate of discounting 10%

NPV Calculation

Years 1967 1968 1969 1970 1971 1972 1973

Periods 0 1 2 3 4 5 6

Initial cash flow -100 -200 -200 -200 -200

Initial deposit 140 140 140 140
Production Costs -490 -490 -490
Final deposit 420 420

Total cash flows -100 -200 -200 -60 -550 70 70

NPV $ -584.05

At 10% rate of discounting The value of the Tristar program at 210 units of production is $ -584.05 mn
At 15% rate of discounting The value of the Tristar program at 210 units of production is $ -580.87 mn
At 20% rate of discounting The value of the Tristar program at 210 units of production is $ -563.86 mn
1974 1975 1976 1977
7 8 9 10

140 140
-490 -490 -490
420 420 420 420

70 70 -70 420
LOCKHEED TRISTAR CASE STUDY ANSWER 2

Total Units 300

Number of units per year 50
Cost of production 12.5
Sale Price 16
Rate of discounting 10%

NPV Calculation

Years 1967 1968 1969 1970 1971 1972

Periods 0 1 2 3 4 5

Initial cash flow -100 -200 -200 -200 -200

Initial deposit 200 200 200
Production Costs -625 -625
Final deposit 600

Total cash flows -100 -200 -200 0 -625 175

NPV $ -274.38

At 10% rate of discounting As per NET PRESENT VALUE method, Lockheed doesnot break even at 300 units of
At 15% rate of discounting As per NET PRESENT VALUE method, Lockheed doesnot break even at 300 units of
At 20% rate of discounting As per NET PRESENT VALUE method, Lockheed doesnot break even at 300 units of
 1973 1974 1975 1976 1977
6 7 8 9 10

200 200 200

-625 -625 -625 -625
600 600 600 600 600

175 175 175 -25 600

ot break even at 300 units of production (npv= -274.38)

ot break even at 300 units of production (npv= -355.62)
ot break even at 300 units of production (npv= -396.43)
LOCKHEED TRISTAR CASE STUDY ANSWER 3

Total Units 300

Number of units per year 50
Cost of production 12.5
Sale Price 16
Rate of discounting 10%

Accounting profit calculation

Years 1967 1968 1969 1970 1971 1972

Periods 0 1 2 3 4 5

Initial cash flow -100 -200 -200 -200 -200

Initial deposit 200 200 200
Production Costs -625 -625
Final deposit 600

Total cash flows -100 -200 -200 0 -625 175

Accounting Profit $ 150.00

Accounting breakeven is achieved when 300 units are produced at $12.5 million
Accounting breakeven is not exactly roght as we donot know the continuous effect of learning curve on the production cost of th

Total Units 480

Number of units per year 80
Cost of production 12.5
Sale Price 16
Rate of discounting 10%

NPV Calculation

Years 1967 1968 1969 1970 1971 1972

Periods 0 1 2 3 4 5

Initial cash flow -100 -200 -200 -200 -200

Initial deposit 320 320 320
Production Costs -1000 -1000
Final deposit 960

Total cash flows -100 -200 -200 120 -880 280

NPV $ 1.37
At 10% rate of discounting Breakeven is achieved using NPV method at 480 units of production at $12.5 per unit
At 15% rate of discounting Breakeven is achieved using NPV method at 500 units of production at $11 per unit pr
At 20% rate of discounting Breakeven is achieved using NPV method at 507 units of production at $11 per unit pr
 1973 1974 1975 1976 1977
6 7 8 9 10

200 200 200

-625 -625 -625 -625
600 600 600 600 600

175 175 175 -25 600

urve on the production cost of the aircraft

1973 1974 1975 1976 1977

6 7 8 9 10

320 320 320

-1000 -1000 -1000 -1000
960 960 960 960 960

280 280 280 -40 960

f production at $12.5 per unit production cost
f production at $11 per unit production cost (400 units gives a loss of $146.43)
f production at $11 per unit production cost
LOCKHEED TRISTAR CASE STUDY ANSWER 4

A No the decision to pursue Tristar was not reasonable.

The decision was based on the assumption tat the demand for the market would grow at 10%
Total demand 775
Share in demand 35% 40%

Expected Demand 271.25 310

But it is said that 5% would be a more realistic growth rate

Total demand 323
Share in demand 35% 40%

Expected Demand 113.05 129.2

This shows that Lockheed had over estimated the demand for the Tristar aircraft
Break even sales is 480 units at $12.5 production cost per unit
This confirms our belief that Lockheed would not even be able to Break even as expected demand doesnot cross 1

B No. of shares 11.3 mn

Share price as on
Jan '67 64
Jan '71 11

Total dip in share price 598.9

This total dip in share holder value is similar to the NPV of the project at 210 units of production
This shows that the project's NPV and the share price are correlated and that the price of Lockheed shares are dep
pected demand doesnot cross 130 units

of production
rice of Lockheed shares are dependent on the project cashflows
LOCKHEED TRISTAR CASE STUDY ANSWER 1 (assuming continuous learning curve
units 0 300 500
cost 14 12.5 11

Total Units 210

Number of units per year 35
COST per unit 12.95
Sale Price 16
Rate of discounting 10%

NPV Calculation

Years 1967 1968 1969 1970 1971

Periods 0 1 2 3 4

Initial cash flow -100 -200 -200 -200 -200

Initial deposit 140 140
Production Costs -453.25
Final deposit

Total cash flows -100 -200 -200 -60 -513.25

NPV $ -463.80

At 10% rate of discounting The value of the Tristar program at 210 units of production is $ -463.80 m
At 15% rate of discounting The value of the Tristar program at 210 units of production is $ -489.43 m
At 20% rate of discounting The value of the Tristar program at 210 units of production is $ -493.14 m
tinuous learning curve)

1972 1973 1974 1975 1976 1977

5 6 7 8 9 10

140 140 140 140

-453.25 -453.25 -453.25 -453.25 -453.25
420 420 420 420 420 420

106.75 106.75 106.75 106.75 -33.25 420

ts of production is $ -463.80 mn
ts of production is $ -489.43 mn
ts of production is $ -493.14 mn
LOCKHEED TRISTAR CASE STUDY ANSWER 1 (assuming continuous learning curve
units 0 300 500
cost 14 12.5 11

Total Units 300

Number of units per year 50
COST per unit 12.5
Sale Price 16
Rate of discounting 10%

NPV Calculation

Years 1967 1968 1969 1970 1971

Periods 0 1 2 3 4

Initial cash flow -100 -200 -200 -200 -200

Initial deposit 200 200
Production Costs -625
Final deposit

Total cash flows -100 -200 -200 0 -625

NPV $ -274.38

At 10% rate of discounting As per NET PRESENT VALUE method, Lockheed doesnot break even at 3
At 15% rate of discounting As per NET PRESENT VALUE method, Lockheed doesnot break even at 3
At 20% rate of discounting As per NET PRESENT VALUE method, Lockheed doesnot break even at 3
tinuous learning curve)

1972 1973 1974 1975 1976 1977

5 6 7 8 9 10

200 200 200 200

-625 -625 -625 -625 -625
600 600 600 600 600 600

175 175 175 175 -25 600

kheed doesnot break even at 300 units of production (npv= -274.38)

kheed doesnot break even at 300 units of production (npv= -355.62)
kheed doesnot break even at 300 units of production (npv= -396.43)
LOCKHEED TRISTAR CASE STUDY ANSWER 1 (assuming continuous learning curve
A Units 0 300 500
Cost 14 12.5 11

Total Units 270

Number of units per year 45
COST per unit 12.65
Sale Price 16
Rate of discounting 10%

Accounting Profit Calculation

Years 1967 1968 1969 1970

Periods 0 1 2 3

Initial cash flow -100 -200 -200 -200

Initial deposit 180
Production Costs
Final deposit

Total cash flows -100 -200 -200 -20

Accounting Profit $ 4.50

The Break even point as per accounting profit occurs at 270 units of production

B Units 0 300 500

Cost 14 12.5 11

Total Units 388

Number of units per year 64.666667
COST per unit 11.84
Sale Price 16
Rate of discounting 10%

NPV Calculation

Years 1967 1968 1969 1970

Periods 0 1 2 3

Initial cash flow -100 -200 -200 -200

Initial deposit 258.66667
Production Costs
Final deposit

Total cash flows -100 -200 -200 58.666667

NPV $ 0.09

At 10% rate of discounting The Break even point as per NPV method occurs at 388 units o
At 15% rate of discounting The Break even point as per NPV method occurs at 446 units o
At 20% rate of discounting The Break even point as per NPV method occurs at 507 units o
tinuous learning curve)

1971 1972 1973 1974 1975 1976 1977

4 5 6 7 8 9 10

-200
180 180 180 180 180
-569.25 -569.25 -569.25 -569.25 -569.25 -569.25
540 540 540 540 540 540

-589.25 150.75 150.75 150.75 150.75 -29.25 540

1971 1972 1973 1974 1975 1976 1977

4 5 6 7 8 9 10

-200
258.66667 258.66667 258.66667 258.66667 258.66667
-765.6533 -765.6533 -765.6533 -765.6533 -765.6533 -765.6533
776 776 776 776 776 776

-706.9867 269.01333 269.01333 269.01333 269.01333 10.346667 776

V method occurs at 388 units of production
V method occurs at 446 units of production
V method occurs at 507 units of production