Calculate the payback period and discounted payback period for RD-6 satellite.

Information

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 satellites cash flows are tabulated below:

	RD6	MK8
Annual revenue (to be received at the end of year)	105 million	100 million
Annual Operating cost ( (to be paid at the end of year)	25	21
Satellite Life	15	20

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. is this correct?

Payback period

Investment = Cost of Satellite + Cost of Launch = 350+ 100 = $450million

Annual Dep = 450/15 = 30

Annual cash flow = (Annual revenue Annual operating cost - Depreciation) x (1-tax) + Depreciation

= (105 25- 30) x (1 0.3) + 30

= $65 million

Pay period between 6yr and 7yr as 6 x 65 = 390 7 x65 = 455

450-390 = 60 60/65 = 0.92

Payback Period = 6.92