Investment Analysis and Lockheed Tri Star
The debate over the viability of the program centered on estimated “break-even sales” the number of jets that would need to be sold for total revenue to cover all accumulated costs. Lockheed’s CEO, in his July 1971 testimony before Congress, asserted that this break-even point would be reached at sales somewhere between 195 and 205 aircraft. At this point, Lockheed had secured only 103 firm orders plus 75
options-to-buy, but they testified that sales would eventually exceed the break-even point and that the project would thus become “a commercially viable endeavor.”
The preproduction phases of the Tri Star project began at the end of 1967 and lasted four years, after running about six months behind schedule. Various estimates of the up-front costs ranged between $800 million and $1 billion. A reasonable approximation of these cash outflows would be $900 million, occurring as follows: End of Year 1967 1968 1969 1970 1971 Time “Index” t=0 t=1 t=2 t=3 t=4 Cash Flow ($mm) -$100 -$200 -$200 -$200 -$200
According to Lockheed testimony, the production phase was to run from the end of 1971 to the end of 1977, with about 210 Tri Stars as the planned output. At that production rate, the average unit production cost2 would be about $14 million per aircraft. The inventory-intensive production costs would be relatively front-loaded, so that the $490 million ($14 million per plane, 35 planes per year) annual production costs can be assumed to occur in six equal increments at the end of years 1971-1976 (t=4 through t=9).
In 1968, the expected price to be received for the L-1011 Tri Star was about $16 million per aircraft. These revenue flows would be characterized by a lag of a year to the production cost outflows; annual revenues
of $560 million can be assumed to occur in six equal increments at the end of years 1972-1977 (t=5 through t=10). Inflation-escalation terms in the contracts ensured that any...