Lockheed Tri Star and Capital Budgeting $\backslash (\{\}^\{1\}\backslash )$

In $1971,$ the American firm Lockheed found itself in Congressional hearings seeking a $\backslash$$$250$million federal guarantee to secure bank credit required for the completion of the L$-1011$ Tri Star program. The L$-1011$ Tri Star Airbus is a wide$-$bodied commercial jet aircraft with a capacity of up to $400$ passengers, competing with the DC$-10$ trijet and the A$-300$B airbus.

Spokesmen for Lockheed claimed that the Tri Star program was economically sound and that their problem was merely a liquidity crisis caused by some unrelated military contracts. Opposing the guarantee, other parties argued that the Tri Star program had been economically unsound and doomed to financial failure from the very beginning.

$\backslash (\{\}^\{1\}\backslash )$ Facts and situations concerning the Lockheed Tri Star program are taken from U$.$ E$.$ Reinhardt, "Break$-$Even Analysis for Lockheed's Tri Star: An Application of Financial Theory," Journal of Finance $27(1972),821-838,$ and from House and Senate testimony.

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."