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 $800,000 for the first satellite and $900,000 for the second. Development will take 5 years at an expected cost of $130,000 per year for the first satellite; $90,000 per year for the second. The same launch can be used for either satellite and will cost $315,000 at the time of the launch 5 years from now. At the conclusion of the launch, the contracting company will pay Calisto $2,700,000 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 $110,000 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 $410,000. An additional compartment would be added to the launch vehicle at an additional cost of $125,000. As an incentive to do both, the contracting company will pay for both launches plus a bonus of $1,050,000. Using a present worth analysis (PW) with a MARR of 5.00 percent/year, what should Calisto Launch Services do?What is the PW of sat1, sat 2 and both?

Answer 1

		Present Worth (PW) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=MARR=5%=0.05
		N=Year of Cash Flow
		ALTERNATIVE -Sat1 only
	N	Year	0	1	2	3	4	5
	A	Cash flow for Initial Cost	($800,000)
	B	Cash flow Annual cost		($130,000)	($130,000)	($130,000)	($130,000)	($130,000)
	C	Cash flow-Launch cost						($315,000)
	D	Revenue						$2,700,000
	E=A+B+C+D	Net Cash Flow	($800,000)	($130,000)	($130,000)	($130,000)	($130,000)	$2,255,000	SUM
	F=E/(1.05^N)	Present Worth (PW)of Cash Flow	($800,000)	-$123,810	-$117,914	-$112,299	-$106,951	$1,766,852	$505,878
		Present Worth of -Sat1	$505,878
		ALTERNATIVE -Sat-2 only
	N	Year	0	1	2	3	4	5
	A	Cash flow for Initial Cost	($900,000)
	B	Cash flow Annual cost		($90,000)	($90,000)	($90,000)	($90,000)	($90,000)
	C	Cash flow-Launch cost						($315,000)
	D	Revenue						$2,700,000
	E=A+B+C+D	Net Cash Flow	($900,000)	($90,000)	($90,000)	($90,000)	($90,000)	$2,295,000	SUM
	F=E/(1.05^N)	Present Worth (PW)of Cash Flow	($900,000)	-$85,714	-$81,633	-$77,745	-$74,043	$1,798,193	$579,057
		Present Worth of -Sat2	$579,057
		ALTERNATIVE -BOTH
		Initial Cost	$1,810,000	(800000+900000+110000)
		Annual cost	$410,000
		Launch Cost	$440,000	(315000+125000)
		Revenue	$6,450,000	(2700000+2700000+1050000)
	N	Year	0	1	2	3	4	5
	A	Cash flow for Initial Cost	($1,810,000)
	B	Cash flow Annual cost		($410,000)	($410,000)	($410,000)	($410,000)	($410,000)
	C	Cash flow-Launch cost						($440,000)
	D	Revenue						$6,450,000
	E=A+B+C+D	Net Cash Flow	($1,810,000)	($410,000)	($410,000)	($410,000)	($410,000)	$5,600,000	SUM
	F=E/(1.05^N)	Present Worth (PW)of Cash Flow	($1,810,000)	-$390,476	-$371,882	-$354,173	-$337,308	$4,387,747	$1,123,907
		Present Worth of -BOTH	$1,123,907
		RECOMMENDATION:
		Calisto Launch Service should Launch BOTH