Question

Assignment 1: Memo to Management 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 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 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 costof capitalis 16% and the company is subject to a 30% tax rate. Assume that royalties and patentrightpayments are treated as assessable income fortaxpurposes and that taxispaidatthe end of the year in which the income is received. The company is not eligible for any research and developmenttax deductions. During the project analysis period(s), SSF is expected to have other sources of taxable income.

Answer 1

Ans. There are only two option one is to sell the patent outright.And the the other one being licencing arrangement.

Option 1. Sale = $60 millions x 0.7 = $42 millions

Option 1. Licencing = ($20 millions x 0.7) + [($20 millions/1.16) x 0.7] + [($20 millions/1.16x1.16) x 0.7] = $36.46 millions