A company XYZ is considering manufacturing a product in space.
The project lifetime is 10 years and has the following consecutive phases:
Phase 1 (years 1 to 3): The engineering design and development requires 3 years. No production is done during this period
Phase 2 (years 4 to 10): to launch the spacecraft into orbit, operate the equipment from the ground by remote control, and recover the spacecraft with the product. This phase is completed in one year, and will be repeated for the next 6 years for a total of 7 launches. All costs are paid at the end of each year.
1. Phase 1 of the project has a material cost of $800000 paid at the end of first year only. What is the present worth of the material cost of phase 1 (evaluated at the beginning of the first year)?
2. Phase 1 of the project has a labor cost of $3000000 per year paid at the end of each year. What is the present worth of the labor cost of phase 1 (evaluated at the beginning of the first year)? Note that phase 1 is 3 years.
3. Phase 2 of the project has the following costs, all paid at the end of each year:
Launch $6400000
Insurance $540000
Labor $1600000
Material $830000
What is the annual net cash flow in phase 2 if the annual income as a result of sales in phase 2 is $15000000
4. If the annal net cash flow of phase 2 is $4900000 per year, what is the present value of the net cash flow when evaluated at the beginning of phase 2 (year 4)?Note that phase 2 is 7 years.
5. If the evaluated net cash flow at the beginning of phase 2 (Year 4) is $15489600, what is the present value of the net cash flow evaluated at the beginning of the project (first year)?
6. With the present values of phase 1 material and labor costs of $600000 and $5280000, respectively, and phase 2 net cash flow of $10330700, will the company make a minimum 25% return on this investment?
Hint: Enter the difference between the present values of phase 2 net cash flow and the sum of material and labor cost of phase 1. If the difference is positive, then the company makes the minimum 25% return.
7. What is the present worth of all disbursements and receipts during the life time of the project, evaluated at the beginning of the first year, if the project has the following costs:
Phase 1 labor $2750000 (per year paid at the end of each year)
Phase 1 Material $750000 (paid at the end of the first year only
Phase 2 -years 4 to 10, all costs are paid at the end of each year and include:
Launch $6000000
Insurance $660000
Labor $1950000
Material $760000
The project makes an annual income of $12000000 as a result of sales in phase 2.
Hint: The present value of the net cash flow of phase 2, evaluated at the beginning of first year, must be greater than the sum of the present worth of labor and material costs of phase 1, also evaluated at the beginning of first year. The difference would be the answer to this problem. Make sure to include the sign (-) if the answer is negative.
Remember, if the present worth of all disbursements and receipts is positive, the company will make at least 25% annual return on this investment.