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 $750,000 for the first satellite and $850,000 for the second. Development will take 5 years at an expected cost of $150,000 per year for the first satellite; $120,000 per year for the second. The same launch vehicle can be used for either satellite and will cost $275,000 at the time of the launch 5 years from now. At the conclusion of the launch, the contracting company will pay Calisto $2,500,000 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 $150,000 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 $400,000. An additional compartment would be added to the launch vehicle at an additional cost of $75,000. As an incentive to do both, the contracting company will pay for both launches plus a bonus of $1,000,000. Using a present worth analysis with a MARR of 10 percent/year, what should Calisto Launch Services do?
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 $750,000 for the first satellite and $850,000 for the second. Development will take 5 years at an expected cost of $150,000 per year for the first satellite; $120,000 per year for the second. The same launch vehicle can be used for either satellite and will cost $275,000 at the time of the launch 5 years from now. At the conclusion of the launch, the contracting company will pay Calisto $2,500,000 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 $150,000 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 $400,000. An additional compartment would be added to the launch vehicle at an additional cost of $75,000. As an incentive to do both, the contracting company will pay for both launches plus a bonus of $1,000,000. Using a present worth analysis with a MARR of 10 percent/year, what should Calisto Launch Services do?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:### Project Evaluation for Calisto Launch Services
**Problem Description:**
Calisto Launch Services is an independent space corporation tasked with developing and launching one of two different satellites. The following presents the cost and financial structures involved in these projects.
#### Costs for Individual Satellites:
1. **Satellite 1:**
- **Initial Equipment Cost:** $750,000
- **Development Duration:** 5 years
- **Development Cost per Year:** $150,000
- **Launch Vehicle Cost (in 5 Years):** $275,000
2. **Satellite 2:**
- **Initial Equipment Cost:** $850,000
- **Development Duration:** 5 years
- **Development Cost per Year:** $120,000
- **Launch Vehicle Cost (in 5 Years):** $275,000
#### Revenue:
- **Payment by Contracting Company (per satellite):** $2,500,000 (at the conclusion of the launch).
#### Combined Launch Option:
- **Additional Initial Costs:** $150,000 to upgrade facilities.
- **Additional Development Cost per Year:** $400,000 for hiring engineers and workers.
- **Additional Launch Vehicle Cost:** $75,000 for an extra compartment.
- **Contracting Company Incentive for Both Launches:** Additional payment of $1,000,000.
#### Present Worth Analysis:
A MARR (Minimum Attractive Rate of Return) of 10 percent per year is used to evaluate the project financially. Calisto Launch Services must determine the economic viability of their options.
The financial decision involves calculating the present value of each option, factoring in both costs and revenues, and comparing the net present value (NPV) to guide the decision-making process.
---
**Graphical or Diagrammatic Explanation:**
While there are no graphs or diagrams provided in this text, a financial present worth analysis might typically include:
- **Cash Flow Diagrams:** Illustrating inflows (revenues) and outflows (costs) over the project's timeline.
- **NPV Calculations:** Detailing yearly costs, revenues, and the discounting process at the given MARR.
- **Comparative Tables:** Summarizing the present worth of each option for easy comparison.
In order to perform detailed calculations, each year's costs and revenues would be discounted to present value terms using the formula:
\[ PV = \frac{FV}{{(1 + r)^n}} \
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