ACC00152 Business Finance Assignment 1: Memo to Management
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EYE Ltd., the company for which you work has spent $1.5 million in research and development over the past 6 months developing a range of RFID blocking wallets to protect the users against wireless theft of credit card data. EYE’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 boss, EYE’s CFO John Galt, has asked you to analyse the three different options for bringing this product to the market and draft a memo to the Board of Directors providing recommendations on the alternatives, along with supporting analysis.
John 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 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 analyses).
Further details for the various options are as follows:
Two months ago, EYE paid an external consultant $300,000 for a production plan and demand analysis. The consultant recommended producing and selling the product for five years only as technological change will likely render the product obsolete after that time. Sales of the product are estimated as follows:
A1 ACC00152 S1 2016
Estimated sales volume (millions of units)
14 29 3 10 48 52
In the first year, it is estimated that the product will be sold for $19 per unit. However, the price will drop in the following three years to $15 per unit and fall again to $10 per unit in the final year of the project, reflecting the effects of anticipated competition and improving technology in the market. Variable production costs are estimated to be $8 per unit for the entire life of the project. Fixed production costs (excluding depreciation) are predicted to be $1 million per year and marketing costs will be $2 million per year.