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
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.
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