Answer Happy

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 3: Sell the patent rights outright to the company
mentioned in option 2 As an alternative to a licensing arrangement,
BRB has offered to buy the patent rights to the product design from
SMT for $13 million. This amount would be paid in 4 (four) equal
annual instalments, with the first payable immediately.
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.