University Business Finance: MicroNet Technologies Ltd Memo Evaluation

This assignment is a memo to the Board of Directors of MicroNet Technologies Ltd, analyzing three options for commercializing a newly developed technology for driverless sports cars. The report evaluates options including in-house manufacturing, licensing to another company, and selling the patent rights. Using Net Present Value (NPV) as the investment decision rule, the analysis assesses the potential costs and profits of each option over a five-year period. The memo includes detailed financial projections, considering factors such as manufacturing costs, market demand, royalty earnings, and the initial investment of $2.7 million in research and development. Comparative analyses are provided, recommending the optimal strategy based on financial returns and risk assessment. The report also discusses factors like capital requirements, market fluctuations, and long-term profitability, concluding with a recommendation for in-house production to maximize the company's financial benefits and brand value.

Running head: BUSINESS FINANCE
BUSINESS FINANCE
Name of the Student:
Name of the University:
Author’s Note:

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Table of Contents
Memo:..............................................................................................................................................2
Appendix:........................................................................................................................................6

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Memo:
MEMORANDUM
Date: 08 May 2019
To: The Board of Directors, MicroNet Technologies Ltd
From: Finance Officer
Subject: Evaluation of available options for the newly developed technology
Introduction:
The MicroNet Technologies Ltd has developed an improved and innovative technology
for driverless sports cars. It has spent 2.7 million to develop the technology and patenting it.
There are three possible options available to the company to utilize it. In this memorandum all
those three options have been evaluated with analysis of potential costs and profits.
Option A: Manufacturing the product In-House:
The technology is a newly developed and innovative technology. In the initial years there
will be less competitive pressures in the market and the company can easily sell the products at a
higher price in the market. Therefore, the company can use the patent for In-House production of
Cars and selling them into the market. For doing so variable and fixed manufacturing costs to be
incurred have been listed in the Table-A in the appendix. It has been assumed that, there will be
enough demand in the market and the price will be high in the initial years and later on the
demand will be decreased to 11,600 units and the price will fall to $25,000 per unit. The
manufacturing process will use the place which is currently earning 1.5 million as rent from
letting out, hence it has been considered as opportunity cost for the project. Taking into
consideration all those factors the net present value of the project has been computed to $ 157.1
million. The cost of developing the technology is 2.7 million, hence it evidenced that, the In-

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House Production of cars using the technology and selling them in the market can give a total
profit of $154.4 million to the company after recovering the cost of technology development in
five years.
Option B: Licensing the technology to another company:
As an alternative to the In-house production the company can go for Licensing the
technology to the other company and let them manufacture and sell the cars in return of a royalty
per unit sold. It can earn a royalty of $180 per unit and a 2% increase in the sale is estimated.
Based on that, and taking into the base data the future earnings potentials from the royalty has
been projected in the Table-B in appendix. It can be seen from the calculations that, there would
be a total 10.34 million of earnings from the royalties over the projected five years in terms of
present value. Considering the cost of the technology to be 2.7 million it can generate a net of
7.64 million profits over the cost of the technology. In this way the rent income of the company
will remain same. And their will be no additional working capital requirement.
Option C: Selling the patent right to another company:
Lastly the company can sell the patent right of the technology to another company for a
consideration of 10 million, but the payment for the same will be received in four equal annual
instalment starting immediately. It means net earnings from the technology would be 10 million
over the four years period. To evaluate this option, the cash receipts from the purchasing
company over the four years have been discounted by the required rate of return and the present
value of the purchase consideration have been computed to $ 8.20 million (please see Table-C in
appendix). Comparing the cost of technology, a net profit over the cost of building up the
technology can be assessed to $1.79 million. In this option also the company will be earning the

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existing rent income by letting out the property which would have been used in the in-house
manufacturing process.
Comparative Analysis:
Therefore if all the above three options can be compared side by side, it can be well
evidenced that option A, In-House production of the cars using the technology gives the
company a highest return and economic benefits. Though there will be an additional requirement
of 80 million capital for acquiring he equipment for manufacturing, and additional working
capital, still it can generate a huge economic benefit for the company. On the other hand
compared to the first option, rest of the two options can give a very small amount of earnings to
the company. The next two options do not require any additional investment or additional
capital. Also the option B and C are hassle free as no manufacturing and selling is there. The first
options assume more risk and require more capital investment and in return generate more profit
for the company.
Building a technology through research and development requires lots of efforts and time
as well as money. If someone builds up an innovative technology, it can give a huge profit or a
core competitive edge to the company. It can be used efficiently and effectively until the
technology is developed by any other company in the market. Hence it must be utilized properly
to gain as much as profit possible from it. As the technology is changing, after a certain period of
time it will also become old and would be value less. In the initial year it can give a challenging
momentum to the company in terms of price, demand and profitability. The first option satisfies
this assumption, whereas the rest two options, emphasises on a short term and a Hassel-free
nominal income from the developed technology. There are many other factors that need to be

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considered in such a situation to take the ultimate decision. the in-house production can increase
the value of the company as well as he brand and the goodwill of the company. On the other
hand, licensing the technology or selling the technology, the other companies will be enjoying
the hard earned development of the company.
Conclusion:
From the evaluation of available options and the above discussion, it is very much clear
that, using the technology for the in-house production of the car could be more viable for the
company, but it assumes more risks of market fluctuations and requires additional capital
investment. Various factors needs consideration while finalizing such a decision, and a long term
profitability or earnings aspect should be there. Taking all those factors and parameter, it can be
concluded that the first option would be the best for the company for a long term perspective.
Recommendation:
Based of the evaluated figures and profitability of the three options, it can be
recommended for the company to go for the option A, and to manufacture and sell cars
producing them in-house. Though it requires additional investment in equipment in equipment
and working capital, it can give the ultimate benefit and optimal utilisation of their research and
development output. If they can go for the first option it will increase their short term as well as
long term profitability, and it will be a proper and adequate utilisation of the technology.

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Appendix:
Table A

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Table B
Table C