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QUESTION 1

At planned (210 units) production levels, what was the true value of the TRI STAR program?

(in millions)
Federal Guarantee 250
Preproduction Outflow 1967-1971
Production Outflow 1971-1976
Revenue Inflow 1972-1977
Average Preproduction Cost 14
Revenue per aircraft 16
Before Guarantee 210 aircrafts

Time 0 1 2 3 4 5 6 7 8 9 10
Years 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Preproduction Investment -100 -200 -200 -200 -200
Average Production Cost -490 -490 -490 -490 -490 -490
Revenues 420 420 420 420 420 420
Deposites towards future deliveries 140 140 140 140 140 140
Cashflow -100 -200 -200 -60 -550 70 70 70 70 -70 420

NPV @10% -584.85


IRR -9.09%

The true value was $-585.85 million.

QUESTION 2

At a breakeven production of 300 units, did Lockheed really breakeven value terms?

(in millions)
Federal Guarantee 250
Preproduction Outflow 1967-1971
Production Outflow 1971-1976
Revenue Inflow 1972-1977
Average Preproduction Cost 14
Revenue per aircraft 16
Before Guarantee 210 aircrafts

Time 0 1 2 3 4 5 6 7 8 9 10
Years 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Preproduction Investment -100 -200 -200 -200 -200
Average Production Cost -625 -625 -625 -625 -625 -625
Revenues 600 600 600 600 600 600
Deposites towards future deliveries 200 200 200 200 200 200
Cashflow -100 -200 -200 0 -625 175 175 175 175 -25 600

NPV @10% -274.38


IRR 2.38%
Lockheed was not able to reach to a breakeven with the production of 300 units

QUESTION 3

At what sales volume did the TRI STAR program reach true economies (as opposed to accounting)
break-even?

(in millions)
Federal Guarantee 250
Preproduction Outflow 1967-1971
Production Outflow 1971-1976
Revenue Inflow 1972-1977
Average Preproduction Cost 14
Revenue per aircraft 16
Before Guarantee 210 aircrafts

Time 0 1 2 3 4 5 6 7 8 9 10
Years 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Preproduction Investment -100 -200 -200 -200 -200
Average Production Cost -840 -840 -840 -840 -840 -840
Revenues 840 840 840 840 840 840
Deposites towards future deliveries 280 280 280 280 280 280
Cashflow -100 -200 -200 80 -760 280 280 280 280 0 840

IRR 10.58%
RATE 10%
WHOLE FREE WORLD MARKET 755
CAPTURED FREE WORLD MARKET 35-40% Produced Sold
CAPTURED MAREKT (in units) 310 420 310
(in millions)
Federal Guarantee 250
Preproduction Outflow 1967-1971
Production Outflow 1971-1976
Revenue Inflow 1972-1977
Average Preproduction Cost 14
Revenue per aircraft 16
Before Guarantee 210 aircrafts

Time 0 1 2 3 4 5 6 7 8 9 10
Years 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977
Preproduction Investment -100 -200 -200 -200 -200
Average Production Cost -625 -625 -625 -625 -625 -625
Revenues 1000 1333.33 1333.33 1333.33 1333.33 1333.33
Deposites towards future deliveries 333.33 333.33 333.33 333.33 333.33 333.33
Cashflow -100 -200 -200 -133.33 -491.67 708.33 1041.66 1041.66 1041.66 708.33 1333.33

IRR 45.71%
RATE 10%
WHOLE FREE WORLD MARKET 755
CAPTURED MAREKT (in units) 310

QUESTION 4

Was the decision to pursue the TRI STAR program a reasonable one? What were the effects of the
project on Lockheeds shareholders?

The program TRI STAR was not reasonable as the NPV at the given rate of 10% was negative. Due to
the adoption of this project the share price of the company fell from $70 to $3 during this period.
There were about 11.3 million shares outstanding during this period.