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 $700 thousand for the first satellite and $820 thousand for the second. Development will take 5 years at an expected cost of $140 thousand per year for the first satellite; $170 thousand per year for the second. The same launch vehicle can be used for either satellite and will cost $245 thousand at the time of the launch 5 years from now. At the conclusion of the launch, the contracting company will pay Calisto $2.5 million for either satellite.
    Calisto is also considering whether they should launch both satellites. Because Calisto would have to upgrade its facilities to handle two concurrent projects, the initial costs would rise by $110 thousand 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 $430 thousand. An additional compartment would be added to the launch vehicle at an additional cost of $35 thousand. As an incentive to do both, the contracting company will pay for both launches plus a bonus of $0.95 million. Using a future worth analysis (FW) with a MARR of 12.00 percent/year, what should Calisto Launch Services do?

What is the future worth of the first satellite?

What is the future worth of the second satellite?

What is the future worth of both satellites?

Which alternative should be selected on the basis of a future worth analysis?

Answer 1

We are required to calculate the FW here

FW = PMT * (1+Interest Rate) ^ Duration

a) The initial cost of 1st satellite is $700000
The time duration for the project is 5 years and interest rate is 12%.

FW of initial investment
-700000 * (1.12 ^ 5) = -1233639.18

FW of annual cost
=FV(12%,5,140000,,1)
= -996126.47

Revenue at the end of 5th year
2500000 - 245000 = 2255000

Total FW
-1233639.18 - 996126.47 + 2255000
= 25234.36

b) Noe we will consider 2nd satellite
We can perform similar calculation like we have done in part a

FV of initial investment cost
=FV(12%,5,,820000,1)
= -1445120.18

FV of annual cost
=FV(12%,5,170000,,1)
= -1209582.14

Revenue
=2500000-245000
= 2255000

Total FW
-1445120.18 -1209582.14 + 2255000
= -399702.32

c) Now the company has decided to launch both satellites.
We can calculate this by per year cash flow also.

	Satellite 1		Satellite 2		Combined
Year	Cash Flow	FW @ 12%	Cash Flow	FW @ 12%	Cash Flow	FW @ 12%
1	-840000	-1480367.01	-990000	-1744718.27	-2060000	-3630423.87
2	-140000	-220292.71	-170000	-267498.29	-430000	-676613.32
3	-140000	-196689.92	-170000	-238837.76	-430000	-604119.04
4	-140000	-175616.00	-170000	-213248.00	-430000	-539392.00
5	-140000	-156800.00	-170000	-190400.00	-430000	-481600.00
6	2255000	2255000.00	2255000.00	2255000.00	4720000.00	5670000.00
Total FW		25234.36		-399702.32		-262148.23

d) The FW analysis shows that the value of the FW is negative the company decides to launch only 2nd satellite or both the satellites. However, launching only 1st satellite has a positive future worth so the company should go for only 1st satellite.