ACC00152 Business Finance
Assignment 1: Memo to Management
You are working in the finance department of Space Sky Flight Ltd (SSF). The Company has spent $6.5 million in research and development over the past 1 2 months developing a drone capable to fix satellites to compete in the space industry. SSF’s directors now need to choose between three options for bringing this product to the market. These options are:
Option A: Manufacturing the product “in-house” and selling directly to the market
Option B: Licensing another company to manufacture and sell t he product in return for a royalty
Option C: Sell the patent rights outright to the company mentioned in option B
Your boss, SSF’s CFO Savanah Harley, has asked you to e valuate the three different options and draft a memo to the Board of Directors providing recommendations on the alternatives, along with supporting analysis.
Savanah has outlined the following three areas you need to cover in your memo:
- 1. Analyse base case figures for the three options and u sing NPV as the investment decision rule;
- 2. Provide recommendations based on the base-case analyses;
- 3. Provide recommendations on further analyses and factors that should be considered prior to making a final decision on the three options (Note. You do NO T have to undertake any further financial analyses).
Further details for the various options are as follows:
Two months ago, SSF paid an external consultant $950,000 for a production plan and demand analysis. The consultant recommended producing and selling the product for five years only as technological innovation will likely render the market too competitive to be profitable enough after that time. Sale s of the product are estimated as follows:
|Year||Estimated sales volume (000’s of units)|
In the primary year, it is assessed that the item will be sold for $110,000 per unit. Nonetheless, the cost will drop in the accompanying three years to $70,000 per uni t and fall again to $50,000 per unit in the last y ear of the task, mirroring the impacts of foreseen rivalry and enhancing innovation in the market. Variable creation costs are evaluated to be $35,00 0 for each unit for the whole existence of the undertaking.
Settled generation costs (barring devaluation) are anticipated to be $11.5 million every year and advertising costs will be $9.5 million every year.
Generation will happen in processing plant space the comp any possesses and at present leases to another business for $7.5 million every year. Hardware costing $275 milli on should be acquired. This hardware will b e deteriorated for assessment purposes utilizing the prime cost me thod at a rate of 20% per annum. Toward the finish of the task, the organization hopes to have the capacity to move the gear for $55 million.
Interest in net working capital will likewise be required. It is assessed that records of sales will be 25% of offers, while stock and records payable will each be 20% of variable and settled generation costs (barring devaluation). This venture is required from the earliest starting point of the undertaking since credit deals, stock stocks and buys on exchange credit will start developing promptly. All records receivable will be gathered, providers paid and inventories sold before the finish of the task, in this manner the interest in net working capital will be returned by then.
Air Jett Inc., a global organization, has ex squeezed an enthusiasm for assembling and advertising t he item under permit for a long time. For every unit sold, Aero Jett will pay $8,250 sovereignty expenses per unit to SSF as a feature of its authorizing assention. Due to Aero Jett ‘s universal reach and solid dispersion systems, it is assessed that they can move 5% a larger number of units every year than SSF.
As an option in contrast to an authorizing course of action, Aero Jett Ltd has offered to purchase the patent rights to the item plan from SSF for $120 million. This sum would be paid in three equivalent yearly portions, with the principal payable promptly.
General Information Relevant to the Analysis
SSF’s cost of capital is 16% and the company is subject to a 30% tax rate. Assume that royalties and patent right payments are treated as assessable income f or tax purposes and that tax is paid at the end of the year in which the income is received. The company is not eligible for any research and development tax deductions. During the project analysis period(s), SSF is expected to have other sources of taxable income.
Your boss has asked that you structure your memo to be gin with a (maximum) one page summary of your method, key findings and recommendations, support ed by no more than three additional pages showing input assumptions, estimated cash flows and supplementary analysis detail and discussion.
Table format for presenting numerical analyses is preferable. Ensure that readers will be able to easily follow what you have done. You may wish to use footnotes under tables that clarify calculations, details and/or assumptions where this is not clear from the table itself.
This assignment has a 30% weighting in your overall m ark for this unit. It will be marked out of 30. Mark s will be allocated as per rubric on following page based on: –
- Accurate analysis of base case figures
- Sound recommendations on the alternatives founded on base case analyses
- Insightful recommendations for further considerations prior to final decision
- Memo format and professionalism of communication
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