Lockheed L1011 Case Study, a Recommendation Essay
From: David F. Akin, Esq.
RE: Recommendation Regarding the Tri Start Wide-body Aircraft Project
Date: 1971 early 72ish
The L-1011 project should be canceled.
Cancelling the L-1011 project will increase shareholder value by $161.92 per share.
Excluding preproduction sunk costs, including a cost of capital 16%, and sales of 113 units and a per unit sales price of $16 million, the net present value (NPV) of continuing with the Tri Star is -$ 1,829,666,246.
Rationale for Decision:
Our original sales expectations were based on the assumption that we would capture 35% to 40% of the large body market. We further projected air travel growth of 10%. This would result in a …show more content…
Appendix 1 (Calculations)
Cost of Capital
Market interest rate 10%
Inflation Premium 01%
Risk Premium 02%
Litigation Premium 01%
Default risk premium 01%
Liquidity premium 01%
Total Interest Rate 16%
Current Shareholder Value
$3.00 per share X 11.3 million Shares = $33.9 million
Adjusted Sales Forecast
Global Market at 5% demand growth 323
Project Lockheed market share 35%
New sales projection 113
Adjusted Cost per Unit
Production Costs $2,940,000,000
Project Sales 113 Cost per unit $26,000,000
Sale Price per unit $16,000,000
Loss per unit $10,000,000
*Note the breakdown of fixed versus variable costs are not know. For purposes of this exercise assume production costs are the same.
Price per plane $16,000,000
Units to be sold x 113
Sales revenue 1,808,000,000
Net Present Value
Less Production Costs $2,940,000,000 NPV -$1,829,666,246
Added Share Holder Value
Savings from cancellation $1,829,666,246
Shares Outstanding 11, 300,000
Added value per share 161.92
Appendix 2 (Research and Additional Analysis)
As of August 1971, both unemployment and inflation are rising quickly. The Nixon