You are working in the finance department of Smartech Ltd (SMT). The Company has spent $3 million in research and develo
Posted: Wed Mar 30, 2022 3:42 pm
You are working in the finance department of Smartech Ltd (SMT).
The Company has spent $3 million in research and development over
the past 12 months developing cutting-edge battery technology which
will be incorporated into the electric vehicle market
Your Task Your manager, SMT’s CFO, Ms Lucinda Harris, 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 analyses. Ms Harris 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 decision rule; b) Provide recommendations based on
the base-case analyses; c) Provide recommendations on further
analyses and discuss 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).
Option 2: Licensing another company to manufacture and sell the
product in return for a royalty Bear Batteries Ltd (BRB), a
multinational corporation, has expressed an interest in
manufacturing and marketing the product under license for 5 years.
For each unit sold, BRB will pay $700 royalty fees per unit to SMT
as part of its licensing agreement. Due to BRB’s international
reach and strong distribution networks, it is estimated that they
can sell 5% more units each year than SMT.
General Information Relevant to the
Analysis
SMT’s weighted average cost of capital (WACC) is 14% 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), SMT is expected to have other sources of taxable
income.
The Company has spent $3 million in research and development over
the past 12 months developing cutting-edge battery technology which
will be incorporated into the electric vehicle market
Your Task Your manager, SMT’s CFO, Ms Lucinda Harris, 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 analyses. Ms Harris 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 decision rule; b) Provide recommendations based on
the base-case analyses; c) Provide recommendations on further
analyses and discuss 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).
Option 2: Licensing another company to manufacture and sell the
product in return for a royalty Bear Batteries Ltd (BRB), a
multinational corporation, has expressed an interest in
manufacturing and marketing the product under license for 5 years.
For each unit sold, BRB will pay $700 royalty fees per unit to SMT
as part of its licensing agreement. Due to BRB’s international
reach and strong distribution networks, it is estimated that they
can sell 5% more units each year than SMT.
General Information Relevant to the
Analysis
SMT’s weighted average cost of capital (WACC) is 14% 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), SMT is expected to have other sources of taxable
income.