The Scenario

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 "leap- frogged" 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 group of common shares, and one group of preferred stock as shown below.Assume the current capital structure will remain unchanged with this project.

Is this project worth doing? The market premium is 6% and the risk-free rate is 3.5%.

What is your decision: DEAL OR NO DEAL? Why?

Different stakeholders may be interested in different numbers, so at a minimum, justify decision by calculating the payback period, the discounted payback period, the NPV, the IRR, the MIRR.

Fill in the Spreadsheet for After Reinvestment Spreadsheet from class Year 0 1 2 3 4 5 6 7 Unit Sales Price Unit cost Revenue (Fixed Costs) (Variable Costs) (Depreciation) EBIT (Tax) AT Operating Income Depreciation Capital (CAP) Net Working Capital (NWC) Free Cash Flow Free Cash Flow Discounted Tax Rate Depreciation Rate Book Value salvage value Irate 8.91% NPV IRR MIRR Payback Discounted Payback FCF = [EBIT * (1-T) + D&A] - [CAPEX + Change in NOWC]Price % of Face Coupon Coupons Paid Maturity Current Yield Bonds Outstanding Market Value Bonds 91.29% 7.00% Annual 5/6/30 7.879% 2,500,000 $ 2,282,250,000.00 Market Risk | CAPM Rate of Market Value Par Value Last Dividend Growth Rate beta Shares Outstanding Market Value Risk Free Rate Premium Return Common Stock 28.35 $ 1.00 $ ).75 5.00% 1.1 273,500,000 $ 7,753,725,000 3.50% 5.00% 10.100% Preferred Stock Market Value Par Value Dividend Shares Outstanding Market Value Return Preferred Stock 115 $ $ 8.75 15,000,000 $ 1,725,000,000 7.609% Bonds Common Stock Preferred Stock WaRd(1-T) + WpRp + WeRe Weights 9% 66% 15% WACO 8.91% Selected Projections (input values) Year 1 Year 2 'ear 3 Year 4 Year 5 Year 6 Year 7 Year 8 Unit Price 150,000 150,000 136,000 136,000 34,000 150,000 150,000 150,000 Unit Sales 35,000 10,000 1 15,000 120,000 $5,000 150,000 175,000 170,000 Variable Costs 120,000 121,000) (124,000) 128,000) (132,000 136,000) 140,000 144,000) Fixed Costs 328,000,000 (334,000,000 (341,000,000) 347,000,000 354,000,000) (361,000,000) (369,000,000) 376,000,000) Securities Data as of November 14, 2018 Deb Rating Price (% of Face) Coupor Coupons Paid Maturity Current Yield Bonds Outstanding Market Value Bond 1 BBE 91.29 7.00% annual 5/6/30 (10 Yrs) 7.879 2,500,000 2,282,250,000 Common Stock Market Value Par Value Last Dividend Growth Rate Beta Shares Outstanding Market Value Class A Shares $28.35 $1.00 0.75 5.00% 1.1 273,500,000 7,753,725,000 Preferred Stock Market Value Par Value Dividend Shares Outstanding Market Value Shares $1 15.00 $100 $8.75 15,000,000 1,725,000,000