Home / Questions / Your company is considering spending $3 billion to purchase equipment to build a spaceship...
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 "leapfrogged" 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.
Apr 28 2020 View more View Less
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