Continental Carriers

In: Business and Management

Submitted By ganesh123
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The recommendation I have would be to diversify into other lines of business either through mergers or investments of corporate funds in the financial securities instead of continuing with the TriStar project and the production of the TriStar aircrafts. The problem with the TriStar project is that it is not financially profitable because it is based on unrealistic sales forecasts calculated on the hope of capturing maybe 35% to 40% of the total free world market of 775 airbuses. The market was defined by 10% annual growth of air travel. A much more realistic approach would’ve been to have calculated a sales forecast on a 5% growth rate travel, which would lead to 323 aircrafts being built and a sales forecast of 113 TriStars. The second problem with this project would be that the break-even sales are incorrect. Lockheed predicted that the project would break even at between 195 and 205. Instead the break-even is more than twice as high at 450. The third problem with the TriStar project would be the cash flow. Cash flow does not become positive until at least the 50th TriStar has been sold. When considering this and future positive cash flows, these are not high enough to cover the pre-production costs that have been incurred. In conclusion, even under the most favorable conditions that Lockheed could have viewed the TriStar project in 1968, it turns out that the project does not even have a positive return on investment or even a way to recover from expenses. Also, investing in the production of TriStar aircrafts only increases opportunity costs of financial resources used for the production and development of TriStar ($900 mil) that must be committed to the project. This is the reason why Lockheed needs to invest in other areas through acquisitions and mergers and not committing so much to such a project like…...

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