According to a recent Time Magazine article, corporation X successfully won a co

Question

According to a recent Time Magazine article, corporation X successfully won a contract from the US government to provide three dimensional satellite television services to the CIA to help with intelligence operations. However, in order to provide the service, the corporation must invest heavily in satellite and telecommunications equipment. The project will take nine years to complete at a cost of $24 million per year. The corporation will be able to start providing the service nine years from now, and the first bill will be due 12 months later. The corporation will bill the CIA annually, but it assumes that it won’t be able to raise rates for an extremely long time because of bipartisan politics in Congress. Assuming a discount rate of 8%, how much would the corporation have to charge the government to break even if rates must remain constant forever?

Explanation / Answer

Statement showing PV of all cash flow

Here revenue is assumed to be X

Since it will be charged for annuity , present value of reveue at end of year 10 = Annuity/rate of interest

=X/0.08

PV of all cash out flow = 149.93

PV of all cash inflow = 0.46X/0.08

Break even point

149.93 = 0.46X/0.08

=11.9944 = 0.46X

X = 26.075 million

Thus corporation will charge $26.075 million per year

Particulars 1 2 3 4 5 6 7 8 9 10 Revenue -24.00 -24.00 -24.00 -24.00 -24.00 -24.00 -24.00 -24.00 -24.00 X/0.08 PVIF @ 8% 0.93 0.86 0.79 0.74 0.68 0.63 0.58 0.54 0.50 0.46 PV -22.22 -20.58 -19.05 -17.64 -16.33 -15.12 -14.00 -12.97 -12.01 0.46X/0.08

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