Question 1
If only one capital budgeting technique could be used to evaluate a project, which of the following would be the most preferred?
◦ Payback
◦ IRR
◦ MIRR
◦ Profitability index
◦ NPV
Question 2
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?
◦ Larger than $70; hard to tell without more information
◦ Much less than $70, as the project clearly had a large, negative NPV
◦ About $70; the NPV of the project was close to zero
◦ $70; the NPV of a project does not affect the stock price
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