Business Finance: Evaluating SSF's Drone Investment Options

This report, prepared for Space Sky Flight Ltd (SSF), evaluates three investment options for a drone project: manufacturing in-house, licensing to another company, and selling patent rights. The analysis employs Net Present Value (NPV) to assess the financial viability of each option over a five-year period. Option A (in-house manufacturing) involves significant initial investment but projects the highest NPV at 73.66 million. Option B (licensing) offers a more moderate NPV of 39.07 million through royalty fees. Option C (patent rights sale) yields an NPV of 36.47 million. The report recommends Option A based on its superior financial returns, while also acknowledging the substantial initial capital requirement. The memorandum includes detailed financial tables showing cash flows, tax implications, and discounted values, providing a comprehensive basis for the investment decision. The report concludes with a recommendation for the directors to proceed with the manufacturing process, highlighting its potential for generating high income and future revenue.

Running head: ACC00152 BUSINESS FINANCE
ACC00152 Business Finance
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Author Note

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Table of Contents
Memorandum.............................................................................................................................2
References and Bibliography:....................................................................................................5

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Memorandum
The Directors
Space Sky Flight Ltd
Subject: Evaluating three different options for the Directors
The main attribute of the overall assessment is to identify the viable investment option
presented for Sky Flight Ltd to improve their returns from investment. The calculations
would relatively help in understanding the best possible projects that could be provided to the
organization for improving their future profits. Three different types of scenarios has been
analyzed by utilizing the investment appraisal technique such as (NPV) Net Present Value, as
it helps in understanding the current value of the overall cash flows that would be generated
in future. Baum and Crosby (2014) indicated that NPV is considered an appropriate
investment appraisal tool that allows companies to detect the best possible investment option,
as time value of money is considered while calculating the benefits provided from a particular
project.
Option A: Manufacturing the product “in-house” and selling directly to the market
NPV-Option A Year 0 Year 1
Year
2 Year 3 Year 4 Year 5
Sales 440 385 440 240 90
Variable cost 180 158 248 135 68
Fixed production costs 11 11 11 11 11
Marketing costs 8 8 8 8 8
Depreciation 60 60 60 60 60
Rent (Income Cost) 7 7 7 7 7
EBT 175 142 107 20 -63
Tax 52 43 32 6 -
EAT 122 99 75 14 -63
Cash Flow 182 159 135 74 -3
Equipment cost -300
Salvage value 75

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Accounts receivable -110 -96 -110 -60 -23
Inventory and accounts
payable
-38 -34 -52 -29 -16
Working capital -148 -130 -162 -89 -38
Net working capital -148 18 -32 73 51 38
Free Cash Flow -448 200 128 207 125 110
NPV 73.66
Information presented in the above table directly represent Option A, where the
manufacturing process need to be built by the organization which would eventually help in
generating a total net present value of 73.66 million over the period of 5 years. The analysis
has directly revealed that the overall benefits of cash inflows from the generates the highest
level of returns for the organization. However, the project needs around 448 million for
starting the overall investment, as without which the manufacturing process cannot be built
(Harris 2017). The initial investment consists of the equipment cost of 300 million and net
working capital of 148 million for the overall project.
Option B: Licensing another company to manufacture and sell the product in return for a
royalty
NPV-Option
B Year 0 Year 1
Year
2 Year 3 Year 4 Year 5
Royalty fees 18.69 16.35 25.70 14.02 7.01
Tax 5.61 4.91 7.71 4.21 2.10
EAT 13.08 11.45 17.99 9.81 4.91
NPV 39.07
The second investment option that is provided to the organization is the licensing to another
company for the overall manufacturing process, which will provide royalty fees to be Sky
Flight Ltd. The NPV of the overall project is at the levels of 39.07 million, which indicates
that the company would generator stable revenue stream, if licensing is conducted to Aero
Jett Inc. The royalty fees of 4,450 per unit will be charged on the overall sales that would be

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conducted by Aero Jett Inc. during the time period of five years. Hence, the cash flows are
taxed for determining the appropriate level of income that would be generated over the period
of 5 years.
Option C: Sell the patent rights outright to the company mentioned in option B
NPV-Option C Year 0 Year 1 Year 2
Patent rights
payments 20.00 20.00 20.00
Tax 6.00 6.00 6.00
EAT 14.00 14.00 14.00
Dis-rate 1.00 0.86 0.74
Dis-cash flow 14.00 12.07 10.40
NPV 36.47
The third investment option that is provided to Sky Flight Ltd is the sale process of
patent rights, to Aero Jett Inc, as it would allow the management to generate of NPV value of
36.47 million over a period of time. The constant income stream of 20 million would be
provided over the period of 3 years, which would be subject to taxes. Hence, the calculations
have suggested that the overall values of the patent amount would decline to the level of
36.47 by utilizing the time value of money (Alkaraan 2015).
Recommendations
After analysing all the 3 options, it is detected that NPV-Option A is highest among all the
three options, as it generates a value of 73.66 million. The directors should initiate the
manufacturing process, as it would allow them to generate high level of income in the process
and obtain higher revenues in future.
SSF’s CFO Savanah Harley

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References and Bibliography:
Alkaraan, F., 2015. Strategic investment decision-making perspectives. In Advances in
mergers and acquisitions (pp. 53-66). Emerald Group Publishing Limited.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
Higham, A.P., Fortune, C. and Boothman, J.C., 2016. Sustainability and investment appraisal
for housing regeneration projects. Structural Survey, 34(2), pp.150-167.
Kengatharan, L. and Prashanth Diluxshan, C., 2017. Use of Capital Investment Appraisal
Practices and Effectiveness of Investment Decisions: A Study on Listed Manufacturing
Companies in Sri Lanka. Asian Journal of Finance & Accounting, 9(2), pp.287-306.
Throsby, D., 2016. Investment in urban heritage conservation in developing countries:
Concepts, methods and data. City, Culture and Society, 7(2), pp.81-86.