Evaluation of MNT's New Technology Distribution Channels

To: Board of Directors MicroNet Technologies Ltd
From: <Insert Name>
Date: May 15, 2019
Subject: An Evaluation of MNT’s New Technology Distribution Channels
Background
MicroNet Technologies Ltd (MNT) is considering the development of new technology for sports
cars. They are faced with three options to bring the product into the market. These include:
 Option A: Manufacturing the product “in-house” and selling it directly to the market
 Option B: License method to InoTech Ltd in return for royalty fees
 Option C: Sell the patent rights outright to InoTech Ltd.
Methodology
Capital budgeting techniques such as Net Present Value may be used in project appraisal
(Özsöylev, 2015). The net present value (NPV) involves discounting relevant cash flows at the
company discount rate (Tucker, 2009). An NPV greater than zero suggests that the project is
feasible, whereas an NPV less than zero suggests that the project is not feasible. Furthermore, the
project with the largest NPV should be selected (Ehrhardt & Brigham, 2003).
Findings
The table below summarizes the NPV calculations of the three options.
NPV
Option A: Manufacturing $23,338,283
Option B: Licensing $7,238,285
Option C: Selling $8,208,062
Recommendations
From the table we observe all options have a positive NPV. Furthermore, the NPV under the
manufacturing option is the largest. These results suggest that the new technology will be
profitable. Consequently, we recommend that MNT should manufacture the new technology “in-
house” and sell it directly to the market.
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SUPPLEMENTARY ANALYSIS (THREE PAGES)
Option A: Manufacturing the product “in-house”
General assumptions
Initial investment $80,000,000
Depreciation expense @11% p.a $8,800,0001
Fixed production costs p.a $2,900,000
marketing costs p.a $1,400,000
Lost rental income $1,500,000
Income tax rate 30%
Discount rate 15%
Salvage value at t=5 $14,000,000
Book value at t=5 $36,000,0002
Sales and cost data 0 1 2 3 4 5
Sales price per unit 35,000 30,000 30,000 30,000 25,000
Sales volume in units 20,400 18,300 16,600 14,100 11,600
variable cost per unit 27,200 27,200 27,200 27,200 27,200
Net income 0 1 2 3 4 5
Revenues3 714,000,000 549,000,000 498,000,000 423,000,000 290,000,000
– Cost of goods sold4 557,780,000 500,660,000 454,420,000 386,420,000 318,420,000
– SG&A expenses 1,400,000 1,400,000 1,400,000 1,400,000 1,400,000
– Depreciation expense 8,800,000 8,800,000 8,800,000 8,800,000 8,800,000
Taxable income 146,020,000 38,140,000 33,380,000 26,380,000 -38,620,000
– Taxes 43,806,000 11,442,000 10,014,000 7,914,000 -11,586,000
After-tax income 102,214,000 26,698,000 23,366,000 18,466,000 -27,034,000
Working Capital 0 1 2 3 4 5
Receivables 171,360,000 131,760,000 119,520,000 101,520,000 69,600,000
Inventory 105,978,200 95,125,400 86,339,800 73,419,800 60,499,800
Payables -
105,978,200 -95,125,400 -86,339,800 -73,419,800 -60,499,800
Net working capital5 171,360,000 131,760,000 119,520,000 101,520,000 69,600,000
Annual Net Cash Flow Estimates 0 1 2 3 4 5
Initial Investment -80,000,000 0 0 0 0 0
Terminal cash flow at t=5 6 20,600,000
Change in net working capital -
171,360,000 39,600,000 12,240,000 18,000,000 31,920,000 69,600,000
Opportunity cost of lost rental 1,500,000 1,500,000 1,500,000 1,500,000 1,500,000
1 Depreciation Expense p.a =11%*Cost of Equipment
2 Book value of equipment at t=5 = Cost of Equipment –( depreciation expense *5)
3 Revenues = sales price per unit * sales volume
4 COGS= Variable cost per unit *sales volume +fixed production costs
5 Net Working Capital = inventory +receivables -Payables
6 Terminal cash flow at T=5 (after sale of equipment )= salvage value –Tax rate*( salvage value – book value)
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