In 1967,Lockheed planned to build a wide-bodied passenger aircraft called the L-1011 Tri Star airbus.The pre-production phase of the Tri Star project was planned to end in 1971 and total $1B.Lockheed planned to sell 35 aircraft per year for six years between 1972 and 1977 with an operating profit of $2M per aircraft.This sales forecast was aggressive as it represented a market share of 45% of the world market for wide-bodied aircraft (which was forecast to be about 80 aircraft per year).
By 1971 the company was in financial distress and had to seek a government bailout.
At the end of 1967,Lockheed had 11.3 million shares outstanding which traded at $70 per share.If the market had known the NPV of the L-1011 project at that time,then what would the stock price have been?
A) Larger than $70; hard to tell without more information
B) Much less than $70, as the project clearly had a large, negative NPV
C) About $70; the NPV of the project was close to zero
D) $70; the NPV of a project does not affect the stock price

Question

Quizplus · Accepted Answer

The undiscounted free cash flows from sales of aircraft are only 6 × 35 × $2M = $420M. This is far less than the pre-production costs of $1B, so the NPV is clearly negative.

In 1967,Lockheed Planned to Build a Wide-Bodied Passenger Aircraft Called