ACC00152 Business Finance Assignment 1: Memo to Management Analysis

This finance assignment, a memo to management, evaluates three options for Space Sky Flight (SSF): producing and selling a product, licensing the product, or selling patent rights to Aero Jett Ltd. The analysis, conducted by the finance department, utilizes the Net Present Value (NPV) method to assess the financial viability of each option over a five-year period. Detailed calculations, including contribution margins, fixed costs, depreciation, and tax implications, are provided for each scenario. The memo recommends selling the patent rights to Aero Jett Ltd, based on the highest NPV, while also acknowledging the potential for future competition. The analysis includes working notes for contribution calculation and net working capital computation, along with assumptions made for the financial modeling. The memo concludes with a decision matrix summarizing the NPV of each option, supporting the final recommendation to management.

ACC00152 Business Finance
Assignment 1: Memo to Management

TABLE OF CONTENTS
Part A: Memo.............................................................................................................................3
Decision..................................................................................................................................3
Part B: Supportive analysis........................................................................................................4
NPV of Option: A: producing and selling the product by SSF..............................................4
Net present value of Option B where license is to be given to Aero Jett Ltd........................6
Net present value of Option C in which patent right is sold to Aero Jett Ltd........................6

PART A: MEMO
To Savanah Harley (CFO)
CC: Directors of Space sky Flight (SSF)
Subject: Evaluation of available options of production, licensing or patent to recommend
suitable option for maximisation of profits
From: Finance department
Date: 10-may-2018
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.

PART B: SUPPORTIVE ANALYSIS
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
122500000.0
0
192500000.0
0
105000000.0
0 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