ACC00152 Business Finance April 28, 2020 postadmin Post in Uncategorized ACC00152 Business FinanceAssignment: Analysis and Memo to ManagementDue: Wednesday 13 May, 11:00pm AEDTYou are working in the finance department of Innotech Ltd (INT). The Company has spent $3.4million in research and development over the past 12 months developing battery technology whichwill be incorporated into the Australian luxury car market. INT now need to choose between thefollowing three options for bringing the product to market. These options are:Option 1: Manufacturing the product “in-house” and selling directly to the marketOption 2: Licensing another company to manufacture and sell the product in return for a royaltyOption 3: Sell the patent rights outright to the company mentioned in option 2Your taskYour manager, INT’s CFO, Mr Barry Smith, has asked you to evaluate the three different options anddraft a memo to the Board of Directors providing recommendations on the alternatives, along withsupporting analyses.Mr Smith has outlined the following three (3) areas you need to cover in your memo:a) Analyse base case figures for the three options and using NPV as the investment decisionrule;b) Provide recommendations based on the base-case analyses;c) Provide recommendations on further analyses and discuss factors that should be consideredprior to making a final decision on the three options (Note. You do NOT have to undertakeany further financial analyses).Further details for the various options are as follows:Option 1: Manufacturing the product “in-house” and selling directly to the marketThree months ago, INT paid an external consultant $1.2 million for a production plan and demandanalysis. The consultant recommended producing and selling the product for five years only astechnological innovation will likely render the market too competitive to be profitable enough afterthat time. Sales of the product are estimated as follows:In the first year, it is estimated that the product will be sold for $40,000 per unit. However, the pricewill drop in the following three years to $35,000 per unit and fall again to $33,000 per unit in thefinal year of the project, reflecting the effects of anticipated competition and improving technology Year Estimated sales volume(units)1 5,3002 4,7703 4,2934 3,8645 3,671 in the market. Variable production costs are estimated to be $27,300 per unit for the entire life of theproject.Fixed production costs (excluding depreciation) are predicted to be $3.1 million per year andmarketing costs will be $1.5 million per year.Production will take place in factory space the company owns and currently rents to anotherbusiness for $2 million per year. Equipment costing $90 million will have to be purchased. Thisequipment will be depreciated for tax purposes using the prime cost method at a rate of 10% perannum. At the end of the project, the company expects to be able to sell the equipment for $40million.Investment in net working capital will also be required. It is estimated that accounts receivable willbe 25% of sales, while inventory and accounts payable will each be 20% of variable and fixedproduction costs (excluding depreciation). This investment is required from the beginning of theproject because credit sales, inventory stocks and purchases on trade credit will begin building upimmediately. All accounts receivable will be collected, suppliers paid and inventories sold by the endof the project, thus the investment in net working capital will be returned at that point. (Refer toexample provided in Assessment Details).Option 2: Licensing another company to manufacture and sell the product in return for a royaltyLion Batteries Ltd (LIB), a multinational corporation, has expressed an interest in manufacturing andmarketing the product under license for 5 years. For each unit sold, LIB will pay $1,000 royalty feesper unit to INT as part of its licensing agreement. Due to LIB’s international reach and strongdistribution networks, it is estimated that they can sell 5% more units each year than INT.Option 3: Sell the patent rights outright to the company mentioned in option 2As an alternative to a licensing arrangement, LIB has offered to buy the patent rights to the productdesign from INT for $15 million. This amount would be paid in 4 (four) equal annual instalments, withthe first payable immediately.General Information Relevant to the AnalysisINT’s cost of capital is 12% and the company is subject to a 30% tax rate. Assume that royalties andpatent right payments are treated as assessable income for tax purposes and that tax is paid at theend of the year in which the income is received. The company is not eligible for any research anddevelopment tax deductions. During the project analysis period(s), INT is expected to have othersources of taxable income.Marking CriteriaYour manager at INT has asked that you structure your memo to begin with a (maximum) one-pagesummary of your method, key findings and recommendations, supported by no more than threeadditional pages showing input assumptions, estimated cash flows and supplementary analysis detailand discussion.Table format for presenting numerical analyses is preferable. Ensure that readers will be able toeasily follow what you have done. You may wish to use footnotes under tables that clarifycalculations, details and/or assumptions where this is not clear from the table itself.This assignment has a 30% weighting in your overall mark for this unit. It will be marked out of 30.Marks will be allocated as per rubric on following page based on: Accurate analysis of base case figures (18 marks) Sound recommendations on the alternatives founded on base case analyses (1.5 mark) Insightful recommendations for further considerations prior to final decision (7.5 marks) Memo format and professionalism of communication (3 marks). MARKING CRITERIA Excellent Very Good Good Fair PoorAccurate analysis of base casefigures for Option 1 (13.5 marks)You have selected and used all the correctvariables for the base case analysis andcalculated all the incremental free cashflows and the correct NPV for Option 1(13.5 marks)You have selected and used all the correctvariables for the base case analysis andcalculated most of the incremental freecash flows. You have used the correctmethod to calculate the NPV for Option 1(10-13 marks)You have selected and used most of thecorrect variables for the base caseanalysis and calculated some of theincremental free cash flows. You haveused the correct method to calculate theNPV for Option 1 (7-9.5 marks)You have selected and used some of thecorrect variables for the base caseanalysis and calculated a few of theincremental free cash flows. You haveused the correct method to calculate theNPV for Option 1 (3.5-6.5 marks)None or very few of the correct variableshave been used for the base case analysisand calculated none or hardly any of theincremental free cash flows and thecorrect NPV for Option 1 (0-3 marks)Accurate analysis of base casefigures for Option 2 (3 marks)You have selected and used all the correctvariables for the base case analysis andcalculated all the incremental free cashflows and the correct NPV for Option 2 (3marks)You have selected and used all the correctvariables for the base case analysis andcalculated most of the incremental freecash flows. You have used the correctmethod to calculate the NPV for Option 2(2-2.5 marks)You have selected and used most of thecorrect variables for the base caseanalysis and calculated some of theincremental free cash flows. You haveused the correct method to calculate theNPV for Option 2 (1-1.5 mark)You have selected and used some of thecorrect variables for the base caseanalysis and calculated a few of theincremental free cash flows. You haveused the correct method to calculate theNPV for Option 2 (0.5 mark)None or very few of the correct variableshave been used for the base case analysisand calculated none or hardly any of theincremental free cash flows and thecorrect NPV for Option 2 (0 mark)Accurate analysis of base casefigures for Option 3 (1.5 marks)You have selected and used all the correctvariables for the base case analysis andcalculated all the incremental free cashflows and the correct NPV for Option 3 (1.5marks).You have selected and used all the correctvariables for the base case analysis andcalculated most of the incremental freecash flows. You have used the correctmethod to calculate the NPV for Option 3(1 mark)You have selected and used most of thecorrect variables for the base caseanalysis and calculated some of theincremental free cash flows. You haveused the correct method to calculate theNPV for Option 3 (0.75 mark)You have selected and used some of thecorrect variables for the base caseanalysis and calculated a few of theincremental free cash flows. You haveused the correct method to calculate theNPV for Option 3 (0.5 mark)None or very few of the correct variableshave been used for the base case analysisand calculated none or hardly any of theincremental free cash flows and thecorrect NPV for Option 3 (0 mark)Sound recommendations on thealternatives founded on base caseanalyses (1.5 mark)You have made a recommendation for A, Bor C applying the NPV investment decisionrule (1.5 mark).You have made a recommendation for A, Bor C applying the NPV investment decisionrule (1 mark).You have made an attempt to make arecommendation for A, B or C applying theNPV investment decision rule (0.75 mark).You have made an attempt to make arecommendation for A, B or C applying theNPV investment decision rule (0.5 mark).No recommendations made (0 mark).Insightful recommendations forfurther considerations prior tofinal decision (7.5 marks)Using results from your quantitativeanalysis of the data, yourrecommendations are insightful anddemonstrate a critical application oftechniques used in the capital budgetingprocess (7.5 marks).Using results from your quantitativeanalysis of the data, yourrecommendations are considered anddemonstrate a reasoned application oftechniques used in the capital budgetingprocess (6 marks).Using results from your quantitativeanalysis of the data, yourrecommendations are sound anddemonstrate application of techniquesused in the capital budgeting process (4.5marks).You have made a cursory attempt torecommendation further analysis (1.5-3marks).Very weak or no recommendations made(0-1 mark).Memo format and professionalismof communication (3 marks)Memo contains all of the requiredelements and formatting. Rules ofgrammar & punctuation are followed, nospelling errors or jargon, easily understoodby a lay person (3 marks).Memo contains most of the requiredelements and formatting. Rules ofgrammar & punctuation are followed, fewspelling errors or jargon, easily understoodby a lay person (2-2.5 marks).Memo contains some of the requiredelements and formatting. Rules ofgrammar & punctuation are generallyfollowed, several spelling errors or jargon,the key points of the memo are not clearlystated (1.5 mark).Memo contains some of the requiredelements and formatting. Rules ofgrammar & punctuation are generallyfollowed, several spelling errors or jargon,the key points of the memo are not clearlystated (0.5-1 marks).Memo contains none or very few of therequired elements and formatting andcontains numerous grammatical,punctuation & spelling errors. Lots ofjargon & unexplained acronyms (0 marks).Marking Rubric for ACC00152 S1 2020 Assignment