Lockheed L1011 Case Study, a Recommendation Essays

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To: The Board of Directors

From: David F. Akin, Esq.

RE: Recommendation Regarding the Tri Start Wide-body Aircraft Project

Date: 1971 early 72ish

Recommendation:

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
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Of considerable concern is that Boeing and McDonnel Douglas have a significant head start in the market. In a shrinking market, the Tri Star, though far superior to the competition, may have missed the window of opportunity. Airline revenues are down while labor and fuel costs are rising. This will drive down demand for all producers of wide-body aircraft.

One final and significant concern is the subject of crashes due to explosive decompression (See “The Wave Dynamics of Explosive Decompression in Jumbo Jets”, by V.E. Haloulakas, Eng. D. 1975). Given our current financial condition, wrongful death lawsuits from the families of 400 passengers from just one crash would bankrupt the finest aircraft manufacturer the world has ever known. An average wrongful death judgment of $300,000 would cost $120 million, excluding litigation and potential punitive damages. This combined with the doubtful chances of this project producing any profit makes canceling the project crucial to Lockheed’s future.

Conclusion
Canceling this project is a restructuring theme that will have the goal of improving overall-profit margin through a narrower focus on the company’s core military project business. Our competitors are already well established in the civilian aircraft market. We are not ignorant of the significant financial, emotional and reputational investment

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