Acc00152 Business Finance - Free Assessment Answer
2. Provide recommendations based on the base-case analyses;
Answer:
Introduction:
Analysis of available three projects has been done by considering method net present value. this methods considers the fundamental concept that the money in future is less worthy than the money in hand today, by considering this the discount on cash flows are done by other time of capital costs. The method also depicts that if or if not to create value for investment, and in what quantity. Further, the NPV measure considers the capital cost and the inborn risk while making proposed plan for future. This will help in creating less impact in the NPV than more expected cash flows taking place in past times.
Decision matrix
|
|
Statement showing Evaluation of the 3 alternatives
| ||
|
|
Particulars |
Amount | |
|
A |
NPV as Per Option I |
Production |
$58.66 million |
|
B |
NPV as Per Option II |
Product licensing |
$72.43 million |
|
C |
NPV as Per Option III |
Patent rights |
$72.80 million |
Decision
By considering the analysis of all three options, managerial authorities are recommended to selection option C where instead of production is to be done by company, managers can Patent rights provide to Aero Jett Ltd company. However, by giving patent right to Aero Jett Ltd company will create competitor for themselves which can affect their future profitability.
NPV of Option: A: producing and selling the product by SSF
|
|
|
|
|
|
(In$) |
|
Particulars |
1 |
2 |
3 |
4 |
5 |
|
Total Contribution (in Millions) |
$ 300.00 |
$ 122.50 |
$ 192.50 |
$ 105.00 |
$ 22.50 |
|
Fixed Production Cost |
$11.50 |
$ 11.50 |
$ 11.50 |
$ 11.50 |
$ 11.50 |
|
Fixed Marketing Cost |
$ 9.50 |
$ 9.50 |
$ 9.50 |
$ 9.50 |
$ 9.50 |
|
Depreciation (275-55)*20% |
$44.00 |
$ 44.00 |
$ 44.00 |
$ 44.00 |
$ 44.00 |
|
Opportunity Cost (Rent that can be earned) |
$ 7.50 |
$ 7.50 |
$ 7.50 |
$ 7.50 |
$ 7.50 |
|
Salvage value |
|
|
|
|
$ 55.00 |
|
Cash Flows before tax |
$ 227.50 |
$ 50.00 |
$ 120.00 |
$ 32.50 |
$ 5.00 |
|
Tax @ 30% |
$68.25 |
$ 15.00 |
$ 36.00 |
$ 9.75 |
$ 1.50 |
|
Profit after tax |
$ 159.25 |
$ 35.00 |
$ 84.00 |
$ 22.75 |
$ 3.50 |
|
Add: Depreciation For the Year |
$44.00 |
$ 44.00 |
$ 44.00 |
$ 44.00 |
$ 44.00 |
|
Add: Recovery of working capital |
|
|
|
|
$ 79.70 |
|
After tax cash flows |
$ 203.25 |
$ 79.00 |
$ 128.00 |
$ 66.75 |
$ 127.20 |
|
Discounting Factor @ 16% |
0.8621 |
0.7432 |
0.6407 |
0.5523 |
0.4761 |
|
Present Value of Cash Flows |
$ 175.22 |
$ 58.71 |
$82.00 |
$ 36.87 |
$ 60.56 |
|
Total present value of cash inflows |
$ 413.36 | ||||
|
Less: Initial investment (Cost of equipment + working capital investment) |
$ 354.70 | ||||
|
Net present value |
$ 58.66 | ||||
Working note 1: Calculation of contribution
|
|
|
|
|
|
(In$) |
|
Particulars |
1 |
2 |
3 |
4 |
5 |
|
|
|
|
|
|
|
|
Sales Price per unit |
110000.00 |
70000.00 |
70000.00 |
70000.00 |
50000.00 |
|
(-)Variable Cost per unit |
35000.00 |
35000.00 |
35000.00 |
35000.00 |
35000.00 |
|
Contribution/ Unit of the Product |
75000.00 |
35000.00 |
35000.00 |
35000.00 |
15000.00 |
|
Total Production during the years (in 000 Units) |
4000.00 |
3500.00 |
5500.00 |
3000.00 |
1500.00 |
|
Total Contribution |
300000000.00 |
122500000.00 |
192500000.00 |
105000000.00 |
22500000.00 |
Working note 2: Computation of Net Working Capital
|
Particulars |
|
Sales |
Amount |
Amount In Million |
|
Account Receivable |
(25% of Sales) |
440000000 |
110000000 |
$110 |
|
Account Payable |
(20% of Production Overhead and Variable Cost) |
151500000 |
30300000 |
$30.3 |
|
Working Capital |
(Account Receivable- Account Payable) |
|
|
$79.7 |
Assumptions
- $950,000 paid for a production plan and demand analysis is irrelevant as it is already occurred and has not impact on cash flows in future
- Working capital is computed by reducing current liabilities from current assets
Net present value of Option B where license is to be given to Aero Jett Ltd
|
Particulars |
1 |
2 |
3 |
4 |
5 |
|
Sales units |
4200.00 |
3675.00 |
5775.00 |
3150.00 |
1575.00 |
|
Royalty per product |
$ 8,250.00 |
$8,250.00 |
$ 8,250.00 |
$ 8,250.00 |
$8,250.00 |
|
Total Royalty |
$ 34,650,000.00 |
$ 30,318,750.00 |
$ 47,643,750.00 |
$ 25,987,500.00 |
$ 12,993,750.00 |
|
Total Royalty (In Millions) |
$ 34.65 |
$ 30.32 |
$ 47.64 |
$ 25.99 |
$ 12.99 |
|
Tax @ 30% |
$ 10.40 |
$ 9.10 |
$ 14.29 |
$ 7.80 |
$ 3.90 |
|
After tax cash flows |
$ 24.26 |
$ 21.22 |
$ 33.35 |
$ 18.19 |
$ 9.10 |
|
Discounting Factor @ 16% |
$ 0.86 |
$ 0.74 |
$ 0.64 |
$ 0.55 |
$ 0.48 |
|
Present Value of Royalty |
$ 20.91 |
$ 15.77 |
$ 21.37 |
$ 10.05 |
$ 4.33 |
|
Net present value |
$ 72.43 | ||||
Net present value of Option C in which patent right is sold to Aero Jett Ltd
|
Statement showing Cash Inflows if Patent Rights are sold to Aero Jett Inc. | |||
|
|
|
|
|
|
Particulars |
0 |
1 |
2 |
|
Patent Fees |
$ 40.00 |
$ 40.00 |
$ 40.00 |
|
Tax @ 30% |
$ 12.00 |
$ 12.00 |
$ 12.00 |
|
Patent Fees after tax |
$ 28.00 |
$ 28.00 |
$ 28.00 |
|
Discounting Factor @16% |
$ 1.00 |
$ 0.86 |
$ 0.74 |
|
Present Value of Patent Fees |
$ 28.00 |
$ 24.08 |
$ 20.72 |
|
Net present value |
$ 72.80 | ||
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