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Student Essay

546 words - 3 pages

-------------------------------------------------
Memorandum

From: Maureen Farrell-JacobsR
e: Lockheed L-1011 Tri-Star Case Study

Part 1: Recommendation
Proceed to obtain the $250 million in federal loan guarantees to complete the L-1011 Tri Star program. Seek military aircraft contracts in addition to the civilian aircraft contracts thereby spreading the risk into Lockheed’s well-established military market rather than exclusively into the commercial aircraft market. By making the above changes, Lockheed will potentially yield a NPV of $149.85 million using a 13% required rate of return at 500 units of production sold to both commercial and military markets versus the other end of the spectrum a NPV $-196.31 million in loss using 10% require rate of return at 300 units of production sold exclusively to commercial markets. In ...view middle of the document...

The decision to move forward is one of minimizing losses and by offsetting some of the preproduction costs and stabilizing the cash flow problems. With further financial analysis, the inclusion of another market the L-1011 Tri-Star will prove to turn around the program’s economic outcome. See appendix for three scenarios of financial analysis that support the rationale for the decision to move forward.
Part 3: Definition of Problem
Lockheed’s L-1011 Tri Star production into the commercial aircraft market is in direct competition Boeing’s 747 wide body aircraft and McDonnell-Douglas’ DC-10. For Lockheed to enter into the commercial market again with the L-1011 Tri Star after the successful L-049 Constellation or “Connie” seems arguably defensive except financial conditions changed with an economic downturn ensuing in commercial airline flights and Lockheed in the throws of congressional investigations of Lockheed’s F104 selection processes including possible scandalous bribery of foreign officials. In addition, the jumbo jet was experiencing technical problems from vents as described in “The Wave Dynamics of Explosive Decompression” by V.E. Haloulakos. The size of the vents in between the pressurized and other compartment of the jumbo jet are of serious concern. All of which cannot not be ignored in the calculation of risks associated with the production of the L-1011. In fact, the 10% internal rate of return for the F-1011 needs to be adjusted upward for the additional business, financial and liquidity risks. See appendix for upward calculation of required rate of return.

Part 4: Wrap-up
In conclusion, the financial turnaround is expected to take place over the 9 year production period ended in 1980 with an estimated 500 units of production, an accounting net profit of $2,290 in millions and a positive economic value NPV of $149.85 in millions.
Part 5: Reference Sources

See excel spreadsheet.

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