Case Study
Flexible Investment Modelling for a Commercial Space Station
image courtesy of the MARINA team.
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Motivation
The looming retirement of the International Space Station (ISS) has accelerated interest in commercial alternatives for human habitation in low Earth orbit (LEO). NASA and private entities seek not just technical feasibility but economic viability—a gap this study aimed to bridge. Developed by an interdisciplinary MIT team, the MARINA (Managed, Reconfigurable, In-space Nodal Assembly) concept combines the architecture of a flexible space station with robust investment decision modelling. The central challenge: how to make large, capital-intensive infrastructure attractive to private investors in the face of high uncertainty, long timelines, and limited early demand.
Methodologies
- Deterministic Cost and Demand Modelling: Using market analogues like yacht marinas and malls, the team developed a modular system design centred around a space hotel as the anchor tenant and supplemented by rentable berths and rack space for commercial use.
- Monte Carlo Simulation: Probabilistic modelling replaced fixed inputs for critical drivers such as launch cost, demand for orbital holidays, and construction costs. This simulation generated 2,000 future cash flow scenarios to estimate Expected Net Present Value (ENPV).
- Real Options Analysis: Real-world uncertainties were embedded as decision points, allowing the model to simulate flexible choices (e.g., selling hotel rooms off-plan, delaying construction, expanding capacity only upon demand signals).
- Agent-Based Strategy Integration: Rational agents made decisions within the simulation, triggering pre-defined real options based on observed states of the world.
Insights
The base case (without flexibility) showed limited attractiveness: an Expected Net Present Value (ENPV) of $694 million, requiring a capital expenditure of $6.6 billion, and entailing a 38% probability of negative returns (p. 9). These figures reflect the steep risk of high fixed costs, uncertain demand, and long development timelines that have historically discouraged private investment in LEO stations.
However, incorporating flexible investment strategies and milestone payments from NASA changed the outlook significantly:
- ENPV increased to $2.16 billion when flexibility and NASA milestone payments were added (p. 9, Table 8).
- Capital expenditure dropped to $3.5 billion, as large outlays became conditional and staged over time (p. 10).
- Risk significantly reduced: The probability of a negative NPV dropped below 10%, with the 90% confidence interval narrowing from [-$3B, +$3.6B] in the base case to [-$455M, +$4.3B] in the flexible scenario (p. 9–10).
Training
Relevant lectures:
- Real options analysis
- Monte Carlo simulation
- Sensitivity Analysis
