Original Date: 04/26/1999
Revision Date: 01/18/2007

Marshall Space Flight Center’s (MSFC) Engineering Cost Office developed a discounted cash flow model to analyze commercial business cases for the Reusable Launch Vehicle (RLV). As a result of this effort, NASA redefined government-industry relationships and envisioned a new way of investing in large scale technology development projects. Traditionally, government and industry justify these types of projects on the basis of a cost-benefit analysis. However, the economics of a cost-benefit analysis are different for government and industry. Large scale technology development projects are usually long-term, high-cost investments which are acceptable to government, but not industry. The difference is the cost of capital which is a significant factor for industry. Government can afford to wait 40 or 50 years to realize a payback, but industry’s horizons for return-on-investment are much shorter.

Typically, government relies on industry to shoulder much of the development cost and risk for major systems. However, some technologies are too important to wait for a market-driven development effort. Historical examples include railroads, aviation, and electrical power. In these cases, the government provided assistance in funding, incentives, and other mechanisms to spur development. Revolutionary technologies create new industries and open up vast new frontiers of economic development. The RLV is such a technology and will enable NASA to reduce launch costs by an order of magnitude, thereby increasing launch activity and further driving down launch costs. Lower commercial RLV prices should lead to increased U.S. market shares in the global launch business and development of commercial space industries. This situation, in turn, will provide increased exports, employment, and tax revenues.

MSFC’s model employs discounted cash flow analysis to determine the level and type of incentives and/or investments that NASA can make to encourage commercial development and reduce risks to an acceptable level for industry. This model is an outgrowth of the X-33 and follow-on programs in which independent industry teams each developed their own tools for modeling the business cases for the RLV. These cases were then integrated by MSFC into the RLV Case Study Model to provide NASA with an analytical capability to independently examine the business plans being proposed by industry. The RLV Case Study Model was designed to quantify the business risks involved in a commercial RLV, define key business parameters, and gauge the sensitivity of business variability to these parameters. The model provides flexibility to analyze the effects of various launch parameters and incentive schemes, and addresses both government and industry perspectives. In addition, MSFC’s model is expandable for defining and calculating metrics (e.g., internal rates of return, net present values, life cycle cost), and takes into account microeconomic metrics (e.g., industry profitability, government savings) and macroeconomic considerations (e.g., jobs, corporate and personal taxes). Figure 2-5 depicts the current RLV model structure. New enhancements being added include market elasticity considerations and NASA’s life cycle costs of a space transportation architecture.

The shift to commercial launchers enables NASA to focus on the new frontier of space transportation technology development and the organization’s ultimate customers: the infant space transportation industry and the yet-to-be- developed human space transportation industry. MSFC’s model shows NASA the value of providing appropriate incentives, investments, grants, direct capitalization, and in-kind contributions to industry. This initiative has proven that long term investment in technology and transportation infrastructure is an appropriate role for government. In return, the investment will reduce launch costs for the government and spur the development of the commercial space market with significant macroeconomic benefits to the country. MSFC’s approach can be easily adapted for use by other government agencies as well.

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