The cost of a single RD-6 satellite is $350 million. A MK-8 imaging satellite carries a price
Question:
The cost of a single RD-6 satellite is $350 million. A MK-8 imaging satellite carries a price tag of $300 million. Another significant factor with satellites is the cost of the launch. In particular, launching a single RD-6 satellite into space is expected to cost the company $100 million. Due to its heavier weight, launching a MK-8 satellite warrants a heavy-lift launch vehicle instead of a medium-lift launch vehicle used in the case of a RD-6 satellite launch. As a result, the cost of a MK-8 satellite launch is estimated to be $185 million. Both satellites are to be depreciated straight line down to a book value of zero over their entire useful life. Further details of each satellite’s cash flows are tabulated below:
RD-6 satellite | MK-8 satellite | |
Annual revenue (to be received at the end of the year) | $105 million | $100 million |
Annual operating cost (to be paid at the end of the year) | $25 million | $21 million |
Satellite life | 15 years | 20 years |
In addition to the cash flow information, you have also been provided with the following details:
The corporate tax rate is 30%;
Tax is paid on profits at the end of the year in which it is earned; and,
The required rate of return for both investment opportunities is 9.8% p.a..
Calculate the constant chain of replacement in perpetuity for both RD-6 and MK-8
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary