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 $710 thousand for the first satellite and $800 thousand for the second. Development will take 5 years at an expected cost of $100 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 $2.3 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 $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 $420 thousand. An additional compartment would be added to the launch vehicle at an additional cost of $45 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 7.00 percent/year, what should Calisto Launch Services do?

1) What is the future worth of the first satellite?
2) What is the future worth of the second satellite?
3) What is the future worth of both satellites?

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

a) Launch satellite one

b) Launch satellite two

c) Launch both satellites

d) Not Launch at all

Answer 1

		First Satelite			Second Satelite			Both satelite
Nature of transaction	Year	Cash flow	PVIF@7%	present worth	Cash flow	PVIF@7%	present worth	Cash flow	PVIF@7%	present worth
Initial cost	0	-710000	1	-710000	-800000	1	-800000	-1660000	1	-1660000
Development cost	1	-100000	0.934579	-93458	-170000	0.934579	-158879	-420000	0.934579	-392523
Development cost	2	-100000	0.873439	-87344	-170000	0.873439	-148485	-420000	0.873439	-366844
Development cost	3	-100000	0.816298	-81630	-170000	0.816298	-138771	-420000	0.816298	-342845
Development cost	4	-100000	0.762895	-76290	-170000	0.762895	-129692	-420000	0.762895	-320416
Development cost	5	-100000	0.712986	-71299	-170000	0.712986	-121208	-420000	0.712986	-299454
Cost of Launch	5	-245000	0.712986	-174682	-245000	0.712986	-174682	-290000	0.712986	-206766
Revenue from launching satelite/s	5	2300000	0.712986	1639868	2300000	0.712986	1639868	5550000	0.712986	3957073
Present worth of each option(PW)				345167			-31847			368224
Future worth of each option=PW*1.402552				484114			-44667			516454
				Requirement 1			Requirement 2			Requirement 3
Requirement 4
On the basis of future worth analysis, its alternative c (Lauch both satelites) which should be selected
Future worth component can be found out as follows
Year	Component
0	1
1	1.07
2	1.1449
3	1.225043
4	1.310796
5	1.402552