Your company is considering spending $3 billion to purchase equipment to build a spaceship to…

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 “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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