Question

technology in the market. Variable production costs are estimated to be $45,000 per unit for the entire life of the project. ACC00152 Business Financet 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 12 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 B: Licensing another company to manufacture and sell the product in return for a royalty Fixed production costs (excluding depreciation) are predicted to be $10.5 million per year and marketing costs will be $8 million per year. Production will take place in factory space the company owns and currently rents to another business for $7 million per year. Equipment costing $300 million will have to be purchased. This equipment will be depreciated for tax purposes using the prime cost method at a rate of 20% per annum. At the end of the project, the company expects to be able to sell the equipment for $75 million. Investment in net working capital will also be required. It is estimated that accounts receivable will be 25% of sales, while inventory and accounts payable will each be 20% of variable and fixed production costs (excluding depreciation). This investment is required from the beginning of the project because credit sales, inventory stocks and purchases on trade credit will begin building up immediately. All accounts receivable will be collected, suppliers paid and inventories sold by the end of the project, thus the investment in net working capital will be returned at that point. 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 12 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 the product in return for a royalty Option C: Sell the patent rights outright to the company mentioned in option B Your task Your boss, SSF's CFO Savanah Harley, has asked you to evaluate 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 using 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 NOT have to undertake any further financial analyses). Further details for the various options are as follows: Option B Aero Jett Inc., a multinational corporation, has expressed an interest in manufacturing and marketing the product under license for 5 years. For each unit sold, Aero Jett will pay $4,450 royalty fees per unit to SSF as part of its licensing agreement. Due to Aero Jett's international reach and strong distribution networks, it is estimated that they can sell 5% more units each year than SSF. Option C As an alternative to a licensing arrangement, Aero Jett Ltd has offered to buy the patent rights to the product design from SSF for $60 million. This amount would be paid in three equal annual instalments with the first payable immediately. 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 for 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. Option A 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. Sales ofthe product are estimated as follows: Year Estimated sales volume (000's of units) 3.5 In the first year, it is estimated that the product will be sold for $110,000 per unit. However, the price will drop in the following three years to $80,000 per unit and fall again to $60,000 per unit in the final year of the project, reflecting the effects of anticipated competition and improving
Can you check my answers? here is my answer to this question

Im not sure regarding the calculations I had another tutor answer but I can't seem to respond to check my work or find out what or how mine are different

Answer 1

The correct solution is given below.

Note: working capital is added and released each year as per the need of the specific year.

soles - variable 40 op once 3 Yours 4M CUO OD 240000 18000 15 7500 000 24 7500 000 35000 300 57 Spororo |105001pవరా 1050లకllosophంరాజు SOODUD SOODUD 8OOD ODD 80 DOUD 30000 100DODO TOUD TO OUD 100D OTO TODOS fixed cost - Marketing cost Rent - Depreciation Net profit before tax NPAT Tax 30% + Dep. +/-working GUGUMU boooooooooooDo 60 00000 GOOD 100 60 000 228 Soo colo do GIODOD 135osto (1000) 15 1950 OUD 6 3760000 11270 000 5145000 - 600గారం 60 రాంరా 60 రాంరాం రాం FloDep 0db +YOD OD OVO-400 to 100 o voo +37500 000 Cap. + 22500 000 + Release of w.c + sale of equip. - Purchase equip Cashflew after tax PUF (167) PUCRAT 1500 20 000 (3 (300D ON DED) (65 op om) 55950000 109700000 870000067450000 807000 000 10.862 10.743 10.641 10.552 10.476 4822890081507100 5044670037286180384 132000 NPV = 255822780 - 6500000 - 3000.00 000 = 2952-50677220 I option B Year units revenues Tax cash flow PVEFAT 4200 18690 000 5607000 1308 3000 11277546 3675 16353750 4906135 1447625 8505585 25698750 7709625 17989125 11531029 14017500 4205250 9812250 5416362 7008750 15 75 4906125 2335315 2102625 -dyn 5775 3150 39065837

& Receivable • + Inventory 110000000 70000 000 000 Det een 60000000 29500000 38100000 3360000051600000 29100000 15600000 38 lododd 3360000051600000 29100000 15600 000 loooo 000 70000000 1100D 60000000 22500000 - Payables working Capital Addition Released 0-375 ooOOO - t llopod DOD - 400000 do +4000Dood 100000000 Optionc Year installments Tax 30%. 20000000 GO00000 2000s on 600D0DD 20000000 6000000 CF. PVE PUCF 14000000 14000000 14000000 0.743 19068000 14000000 0.743 10402000 31444000