Iridium Corp. has spent $ 3.5$3.5 billion over the past decade developing a satellite-based telecommunication system. It is currently trying to decide whether to spend an additional $ 350$350 million on the project. The firm expects that this outlay will finish the project and will generate cash flow of $ 15.0$15.0 million per year over the next 5 years. A competitor has offered $ 450$450 million for the satellites already in orbit. Classify the firm's outlays as sunk costs or opportunity costs , and specify the incremental cash flows.

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Business

Corinne Golden

5 October, 06:16

Iridium Corp. has spent $ 3.5$3.5 billion over the past decade developing a satellite-based telecommunication system. It is currently trying to decide whether to spend an additional $ 350$350 million on the project. The firm expects that this outlay will finish the project and will generate cash flow of $ 15.0$15.0 million per year over the next 5 years. A competitor has offered $ 450$450 million for the satellites already in orbit. Classify the firm's outlays as sunk costs or opportunity costs , and specify the incremental cash flows.

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Turner Gonzalez · Answer 1

1. sunk costs : $3.5B is a sunk cost as it is already incurred.

2. opportunity costs: Addl $350M investment for finishing project is an Opportunity cost. However it will yield $15M pa for next 5 Yrs. So PV of this CF is less than $15*5=$75M. SO NPV = CF0+CF1 ... + CF5 = - 350 + Less than 75 = negative.

SO another Opportunity of selling the Satellite for $450 M is a better option.

3. specify the relevant cash flows.

If Addl $350M investment is undertaken, $350M will be Cash outflow in Y0. It will result in Annual CF of $15M for next 5 yrs.