Lockheed Case Study

Financial Decision Making

Case Study #01

Lockheed Tri Star and Capital Budgeting

In the 1950s, The Boeing Company became well known for its “bet the company strategy” in launching its new generation of wide-body commercial jet aircraft. With the success of the Boeing 707, and 747 to follow, Lockheed saw an opportunity that it could not pass up. The demand to serve the huge US domestic airline commercial passengers that would supply the medium-to-long-range haul marketplace, Lockheed made the decision to “betting it all” by once again entering the commercial market after its failed attempt in the 1950s with the L-188 Electra.

After six grueling years of design, Lockheed delivered the L-1011 TriStar to its first client, Eastern Airlines in 1972. A program that had early financial and development problems, an evaluation of its performance metrics (Appendix A) leads me to recommend that Lockheed TriStar program not continue moving forward with the L-1011 because at its planned production levels of 210 units, the TriStar program net present value (NPV) is measured to be ($408M), a negative metric that clearly indicates this program will not optimize shareholder value. Additionally, with a “break-even” production of 300 units, the Lockheed TriStar program measures a net present value (NPV) of ($126M), an additional indicator that this program should not continue forward. The superior technology behind their military aircraft, Lockheed has proven that it can deliver a sophisticated aircraft to a committed consumer. With the yearly annual losses, the price per share has fallen to $3.25/share. Lockheed needs to reconsider, and in my recommendation that it should not continue with the L1011 program, a commitment to their military aircraft would result with positive cash flow for the company. A proven track record and product that Lockheed has been successful in. Increased revenues will lead to shareholder commitment to Lockheed and a cycle that will allow the...