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 $750 thousand for the first satellite and $800 thousand for the second. Development will take 5 years at an expected cost of $170 thousand per year for the first satellite, $140 thousand per year for the second. The same launch vehicle can be used for either satellite and will cost $215 thousand at the time of the launch 5 years from now. At the conclusion of the launch, the contracting company will pay Calisto $2.1 millon for either satellite.
Calisto is also considering launching both satellites. Because Calisto would have to upgrade its facilities to handle two concurrent projects, the initial costs would rise by $150 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 $350 thousand. An extra compartment would be added to the launch vehicle at an additional cost of $75 thousand. As an incentive to do both, the contracting company will pay for both launches plus a bonus of $1.2 million. Using an internal rate of return analysis with a MARR of 7%/year, what should Calisto Launch Services do?

Which of the following lists indicate the proper alternatives for this problem:

1) First satellite only, second satellite only

2) First satellite only, second satellite only, both satellites

3) First satellite only, second satellite only, both satellites, neither satellite

4) First satellite only or second satellite only or neither satellite

Answer 1

3) Indicates the proper alternatives for this problem.

As can be seen from the following working, launching both the satellites only will be profitable for Calistro Launch Services. Either of the satellies separately will be giving negatve NPVs , among them Satellite 1 launch will result in higher losses compared to launch of Satellite 2.

Working:

Satellite 1.
	0	1-5	5
Initial cost	-750000
Annual cost		-170000
Lanuch Cost			-215000
Contract Price			2100000
Net Cash Flow	-750000	-170000	1885000
MARR	7%	7%	7%
PV Factor	1	4.1002	0.713
Present Value	-750000	-697034	1344005
NPV	-103029
Satellite 2
	0	1-5	5
Initial cost	-800000
Annual cost		-140000
Lanuch Cost			-215000
Contract Price			2100000
Net Cash Flow	-800000	-140000	1885000
MARR	7%	7%	7%
PV Factor	1	4.1002	0.713
Present Value	-800000	-574028	1344005
NPV	-30023
Satellite 1 & 2
	0	1-5	5
Initial cost	-1550000
Annual cost		-310000
Lanuch Cost			-215000
Contract Price			5400000
Net Cash Flow	-1550000	-310000	5185000
MARR	7%	7%	7%
PV Factor	1	4.1002	0.713
Present Value	-1550000	-1271062	3696905
NPV	875843