Exploring the Unknown - NASA's History Office

of a dollar of profit from future operations. This is accomplished by discounting the
future expenditures and receipts (cash flows) at a constant annual rate. If the sum of all
the discounted cash flows for a project equals zero, then this rate is defined as the rate of
Return on Investment (ROI) or Internal Rate of Return (IRR). This rate is analogous to
an annual after-tax interest rate on the dollars at risk. The cash flows for a 10 plant operation
are shown in Figure 12. The shaded areas represent the present values of the cash
flows discounted at [9] [original placement of Figure 12] the rate of return on investment.
The negative cash flows during the first three years represent the investment for
plant construction. As shown, the ROI is 29.5%, which for an effective corporate tax rate
of 48%, is analogous to a pretax return of 57%.
Annual Cash Flow—$M
120
80
40
Figure 12. 10 plant cash flow
0
-40
-80
EXPLORING THE UNKNOWN 507
Cash Flow, Receipts Positive
Present Value at 29.5% Return on Investment (ROI)
Cumulative Cash Flow $248M
Cumulative Present Value 0
1 2 3 4 5 6 7 8 9
Year
In a sensitivity analysis of rate of return on investment the number of plants, plant first
unit cost, and integrated circuit processing yield (ribbon value) were found to be the
major cost drivers, while Shuttle transportation cost was found to have a more moderate
effect. The variation of return on investment with the total number of plants deployed is
shown in Figure 13. Return on investment for one plant is relatively low, because the
design, development, test and engineering (DDT&E) costs are approximately equal to the
plant cost or $16M. As the number of plants increases, the DDT&E costs are spaced over
more plants and the plant unit cost is decreased by a 91% learning curve, thus increasing
return on investment. The return on investment for the selected 10 plant baseline (5% of
1985 market) is calculated as 29.5%. The number of plants also has an effect on the payback
period or time required for the manufacturer to get his investment [original placement
of Figure 13] back as shown in Figure 14. This figure shows cumulative cash flows,
with the low points reflecting the maximum cash investment, the crossover points, the payback
periods, and the end points the total after tax earnings. For the baselined 10 plants,
the maximum investment is $120M, the payback period is 5.3 years, and the total net earnings
are $248M.