The cost of a single RD-6 satellite is $350 million. A MK-8 imaging satellite carries a price tag of $300

The cost of a single RD-6 satellite is $350 million. A MK-8 imaging satellite carries a price tag of $300

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 satelliteMK-8 satelliteAnnual revenue (to be received at the end of the year)$105 million$100 millionAnnual operating cost (to be paid at the end of the year)$25 million$21 millionSatellite life15 years20 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

Expert Answer:

Answer rating: 100% (QA)

To calculate the constant chain of replacement in perpetuity for both the RD 6 and MK 8 satellites we need to determine the net cash flows for each sa
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