# Question: AK Radio has hired a consultant to help in the

AK Radio has hired a consultant to help in the assessment of a project to launch a satellite to deliver a 24/7 infomercial radio station to the world. The satellite costs \$500 million and has a CCA rate of 35 percent. The satellite is expected to last 10 years and then burn up in the earth’s atmosphere. AK does not expect to replace the satellite, and the asset class will terminate in 10 years. The launch is expected to take place in two years and will cost \$5 million. Satellite launches are risky undertakings, and there is a 40 percent chance that the rocket taking the satellite into space will explode on take-off. If the launch fails, AK will close the business, as it will have only \$50 million of cash left and will be unable to acquire another satellite.
A terrestrial (land-based) infomercial radio station is expected to generate annual pre-tax operating cash flows of \$50 million per year, while a satellite-based system is expected to generate operating cash flows of −\$25 million for the first three years after the satellite goes up, and \$150 million per year for the next seven years. Due to licensing restrictions, AK must decide now whether it will be a satellite-based or land-based infomercial station. Radio stations can operate only in one area—terrestrial or space.
The tax rate for AK is 35 percent. The appropriate discount rate for AK is 20 percent.
a. Calculate the NPV of a terrestrial project. Assume it lasts 12 years.
b. If the satellite launch project is successful, calculate beginning UCC, CCA, ending UCC, after-tax cash flow every year. Calculate the present value of CCA terminal loss. Calculate the NPV of the satellite launch project if it is successful.
c. If the satellite launch project fails, calculate beginning UCC, CCA, ending UCC, after-tax cash flow every year. Calculate the present value of CCA terminal loss. Calculate the NPV of the satellite launch project if it fails.
d. Calculate the NPV of the satellite launch project. Do you recommend that AK invest in the satellite launch project?
e. Describe how your analysis would change if the licensing restriction allowed AK to decide on terrestrial or space in two years.

Sales0
Views120