Your company is considering spending $3 billion to purchase equipment to build a spaceship to Mars. The equipment is depreciated straight-line over 8 years, and it costs $100 million to install. Assume equipment is fully installed within the next year. Your initial price point for an individual to fly to round-trip to Mars is $150,000 and your projected sales volume is 85,000 seats. Fixed costs are $328,000,000 and each trip costs $120,000 in variable costs. Subsequent years’ projections are shown on the next page. Your marginal tax rate is 26%. Assume that this is one of many projects for the company. No special tax treatments are required for years of negative earnings. An initial working capital investment of $270,000,000 is required. You will need to upgrade your technology in 5 years when the competition has "leap-frogged" your ship. You will invest an additional $680 million in equipment and an additional net working capital of $135,000,000. The additional investment will be depreciated over the remaining three years of the project. You can sell all of your equipment for $2,500,000 (salvage value) at the end of year 8. Also, all working capital investments are recouped at the end of year 8 as well. You have one bond outstanding, one class of common shares, and one class of preferred stock as shown below. Assume the current capital structure will remain unchanged with this project. Is this project worth doing? The market premium is 6% and the risk-free rate is 3.5%. 

What is your decision: DEAL OR NO DEAL? Different stakeholders may be interested in different numbers, so at a minimum, justify your decision by calculating the payback period, the discounted payback period, the NPV, the IRR, the MIRR.

 

Transcribed Image Text:

Selected Projections (input values) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Unit Price 150,000 150,000 136,000 136,000 134,000 150,000 150.000 150,000 Unit Sales 85,000 110,000 115.000 120.000 65,000 150,000 175,000 170,000 Variable (120,000) (121,000) (124,000) (128,000) (132,000) (136,000) (140,000) (144,000) Costs Fixed Costs (328,000,000) (334,000,000) (341,000,000) (347,000,000) (354,000,000) (361,000,000) (369,000,000) (376,000,000) Securities Data as of November 14. 2018 Debt Rating Price (% of Face) Coupon Coupons Paid Maturity Current Yield Bonds Market Value Outstanding Bond 1 BBB 91.29 7.00% annual 5/6/30 (10 Yrs) 7.879 2,500,000 2,282,250,000 Common Stock Market Value Par Value Last Dividend Growth Rate Beta Shares Market Value Outstanding $28.35 $1.00 0.75 5.00% 1.1 273,500,000 7,753,725,000 Class A Shares Preferred Stock Market Value Par Value Dividend Shares Market Value Outstanding Shares $115.00 $100 $8.75 15,000,000 1,725,000,000 Selected Projections (input values) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Unit Price 150,000 150,000 136,000 136,000 134,000 150,000 150.000 150,000 Unit Sales 85,000 110,000 115.000 120.000 65,000 150,000 175,000 170,000 Variable (120,000) (121,000) (124,000) (128,000) (132,000) (136,000) (140,000) (144,000) Costs Fixed Costs (328,000,000) (334,000,000) (341,000,000) (347,000,000) (354,000,000) (361,000,000) (369,000,000) (376,000,000) Securities Data as of November 14. 2018 Debt Rating Price (% of Face) Coupon Coupons Paid Maturity Current Yield Bonds Market Value Outstanding Bond 1 BBB 91.29 7.00% annual 5/6/30 (10 Yrs) 7.879 2,500,000 2,282,250,000 Common Stock Market Value Par Value Last Dividend Growth Rate Beta Shares Market Value Outstanding $28.35 $1.00 0.75 5.00% 1.1 273,500,000 7,753,725,000 Class A Shares Preferred Stock Market Value Par Value Dividend Shares Market Value Outstanding Shares $115.00 $100 $8.75 15,000,000 1,725,000,000