ANZ Finance blog | Space Junk and Finance | McGraw Hill Australia New Zealand

Space Junk & Finance

Published 19 June 2020

By Dr Peter J Phillips, Associate Professor (Finance & Banking) University of Southern Queensland

Space Junk and Finance -- McGraw Hill ANZ Finance Blog -- Australia and New Zealand

We are living in a new space age. In case we had been slow to notice, the collaboration between a private company (SpaceX) and NASA to launch the first manned space shuttle from US soil since 2011 certainly grabbed our attention. If the astronauts are safely returned to Earth sometime in the second half of 2020, the relationship between SpaceX and NASA will proceed to the next level, with further launches and the eventual fulfilment of a $3 billion contract.

The amount of space activity has expanded significantly over the past 20 years. Unlike the old days when just two countries, the USA and Russia, dominated the space race, many other governments are now actively investing in space and, as the SpaceX example shows, so are private companies and corporations. Between 2012 and 2018, there were around 2,000 private space ventures, with plans to launch up to 20,000 additional satellites by 2025 or 2030.

You might remember hearing somewhere that the space race in 1950s and 1960s provided a boost to innovation that helped to create many of the products that we know today. These include artificial limbs, scratch-resistant lenses, solar cells and much more. Today, space plays a role in our everyday lives. Communications, GPS and so on. Amazon, for instance, is launching thousands of small satellites to provide internet connectivity to previously unconnected parts of the world.

Finance plays a key role in the new space race. Indeed, financing considerations represent a core driver for the uptick in space activity. In the 1970s, right up to the 2000s, it could cost more than $50,000 per kilo to launch material into space. That cost is now around $2,000 per kilo! Space is now far more accessible to companies than ever before and many are taking the plunge.

Of course, a space project is just like any project. A company will not undertake a space project unless the project will create value for shareholders. To evaluate a new idea, a new product, a new market, a merger, an acquisition or anything that requires the allocation of capital, corporate finance managers look at forecasts of positive and negative cash flows and compare their present value with the initial investment. This technique, called net present value (NPV), tells us whether the idea will create value for shareholders. If a project has a positive NPV, it is accepted. If not, it is rejected.

When working out NPV, the forecast cash flows are ‘discounted’ by some rate. This rate includes an allowance for risk. For example, if you expect to receive $100 next year from a reliable friend, you might work out its present value using the risk free rate, say 5% (i.e. ). If you expect to receive $100 next year from a very unreliable friend, you might add a risk factor to the risk free rate, say 8% (i.e. ). When a project is more risky, its cash flows are discounted by a higher discount rate. For space project, there are many risks. One of them is space junk.

We have written a paper, Space Junk: Behavioural Economics and Prioritisation of Solutions, in which we explore the very real problem of space junk. In the paper, we highlight the extent of the problem: the best estimate, current at the end of 2018, is that there are 30,000 baseball sized or larger, 500,000 marble-sized and 170,000,000 micro-sized (between 1 mm and 1 cm) pieces of space junk all travelling at approximately 17,000 miles (28,000 kilometres) per hour. Even the smallest pieces of junk can do enormous damage to a satellite or other space assets. Evaluating space projects requires this risk to be taken into account. Interestingly, attempts to estimate this risk and, indeed, evaluate the potential solutions to the space junk problem, will be shaped by the very same decision-making biases that lead investors to make less than perfect decisions.

In the new space age, there is a place for finance. There is also a place for clear decision-making, which requires an awareness of the ways in which human decision-making processes can be shaped by any number of quirks.

Discussion Question

SpaceX is the most prominent of the corporations involved in the new space age. Who are the other key players? Are they public companies or privately owned? What role do equity markets play in financing the new space age?

Further Reading

The techniques that companies use to evaluate projects are discussed in Chapter 5 of Financial Institutions, Instruments and Markets 9e. In this chapter, we also discuss the issuing of equity to investors, including the various factors that must be considered by the emerging small space companies that might one day want to take their firms public.