Question

Calisto Launch Services is an independent space corporation and has been contracted to develop and launch one of two different satellites. Initial equipment will cost $740,000 for the first satellite and $810,000 for the second. Development will take 5 years at an expected cost of $150,000 per year for the first satellite; $80,000 per year for the second. The same launch can be used for either satellite and will cost $225,000 at the time of the launch 5 years from now. At the conclusion of the launch, the contracting company will pay Calisto $2,350,000 for either satellite.
Calisto is also considering whether they should consider launching both satellites. Because Calisto would have to upgrade its facilities to handle two concurrent projects, the initial costs would rise by $190,000 in addition to the first costs of each satellite. Calisto would need to hire additional engineers and workers, raising the yearly costs to a total of $380,000. An additional compartment would be added to the launch vehicle at an additional cost of $35,000. As an incentive to do both, the contracting company will pay for both launches plus a bonus of $800,000. Using a present worth analysis (PW) with a MARR of 7.00 percent/year, what should Calisto Launch Services do?

(Do all calculations to 5 decimal places and round final answer to 2 decimal places in terms of k (1 k = 1,000). Tolerance is +/- 1.00.

(I) Calculate PW of first satellite
$

(in thousands)

(II) Calculate PW of second satellite
$

(in thousands)

(III) Calculate PW of both satellites
$

(in thousands)

Answer 1

MARR = 7%

1)

Present Worth of Satellite 1

		Satellite I
Period	0	1	2	3	4	5
Initial Cost	-740000
Development Cost		-150000	-150000	-150000	-150000	-150000
Launch cost						-225000
Revenue						2350000
Cash Flows(Sum)	-740000	-150000	-150000	-150000	-150000	1975000
Present Worth	-740000	-140186.916	-131015.809	-122444.6815	-114434.282	1408147.7
Add all Present Worth	160066.016

Notes:

Cash Flows = Sum all the expenses of a particular period

period 5 cash flows = -150000 + (-225000) + 2350000 = > 1975000

Present Worth = Cash Flows / [ 1 + MARR%]^{Period or n}

PW in year 5 = 1975000 / [ 1 + 7% ] ⁵ = > 1408148

Add PWs of all periods =

-740000

-140186.916

-131015.809

-122444.6815

-114434.282

1408147.7

PW of Satellite 1=> $ 160066.02 or $ 160.06 Thousands

2)

Similarly PW of Satellite 2

		Satellite 2
Period	0	1	2	3	4	5
Initial Cost	-810000
Development Cost		-80000	-80000	-80000	-80000	-80000
Launch cost						-225000
Revenue						2350000
Cash Flows(Sum)	-810000	-80000	-80000	-80000	-80000	2045000
Present Worth	-810000	-74766.3551	-69875.0983	-65303.83015	-61031.617	1458056.74
Add all Present Worth	377079.8365

Notes:

Cash Flows = Sum all the expenses of a particular period

Present Worth = Cash Flows / [ 1 + MARR%]^{Period or n}

Add PWs of all periods = >$  377079.84

PW of Satellite 2 =$  377079.84 or $ 377.08 thousands

3)

PW of both satellites

		Both Satellites
Period	0	1	2	3	4	5
Initial Cost	-1740000
Development Cost		-380000	-380000	-380000	-380000	-380000
Launch cost						-260000
Revenue						5500000
Cash Flows(Sum)	-1740000	-380000	-380000	-380000	-380000	4860000
Present Worth	-1740000	-355140.187	-331906.717	-310193.1932	-289900.181	3465112.83
Add all Present Worth	437972.5548

Notes:

a) Initial cost increases by 1900000

b) Total initial cost = 740000 + 810000 + 190000 => 1740000

c) Yearly costs increases to $ 380000 Here it is assumed that 380000 is inclusive of yearly costs of Satellite 1 and Satellite 2

d) Launch Cost increases by 35000 which is assumed to be incur in last year i.e. in year 5 , therefore cost in last year rises to

225000 +35000 => 260000 ( 225000 does not change as same launch can be used for either of the satellite)

e) Revenue = 2350000 for each satellite + Bonus of 800000

= 2350000 * 2 + 800000 => 5500000

Cash Flows = Sum all the expenses of a particular period

Present Worth = Cash Flows / [ 1 + MARR%]^{Period or n}

Add PWs of all periods = >$  437972.55

PW of both satellites = > $ 437972.55 or $ 437.97 Thousands