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?

The three different alternatives have positive NPVs. The alternative with the highest NPV is alternative 3, to develop and launch both satellites (NPV = $241,891). This alternative also has the highest IRR (12.1%). So Calisto should work on both satellites.

Explanation:

                                                         satellite 1         satellite 2

initial cost                                        $750,000       $850,000

if 2 satellites developed                          $150,000

development cost year 1                $150,000        $120,000

if 2 satellites developed                          $130,000

development cost year 2               $150,000        $120,000

if 2 satellites developed                          $130,000

development cost year 3               $150,000        $120,000

if 2 satellites developed                          $130,000

development cost year 4               $150,000        $120,000

if 2 satellites developed                          $130,000

development cost year 5               $150,000        $120,000

if 2 satellites developed                          $130,000

launch vehicle cost year 5                        $275,000

if 2 satellites developed                             $75,000

revenue from launching             $2,500,000    $2,500,000

bonus for launching both                      $1,000,000

MARR = 10%

since there is not enough room here, I used an excel spreadsheet to calculate NPVs of launching satellite 1, satellite 2 or both.