Case Problem 3- Hart Venture Capital
Problem Statement
Hart Venture Capital (HVC) specializes in providing venture capital for software development and Internet applications. Currently HVC has two investment opportunities: (1) Security Systems, a firm that needs additional capital to develop an Internet security software package, and (2) Market Analysis, a market research company that needs additional capital to develop a software package for conducting customer satisfaction surveys. In exchange for the Security Systems stock, the firm has asked HVC to provide $600,000 in year 1, $600,000 in year 2, and $350,000 in year 3. In exchange of their stock, Market Analysis has asked HVC to provide $500,000 in year 1, $350,000 in year 2,
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For example if HVC decides to fund 40% of the Market Analysis project:
.40 x ($500,000) = $200,000 would be required for year 1
.40 x ($350,000) = $140,000 would be required for year 2
.40 x ($400,000) = $160,000 would be required for year 3
Net Present Value of Market Analysis project would be .40 x ($1,600,000) = $640,000.
Our Analysis for HVC investment problem would include us to solve these questions: 1.) What are the recommended percentages of each project that HVC should fund and the net present value of the total investment? 2.) What capital allocation plan for Security Systems and Market Analysis for the coming three year period and the total HVC investment each year would you recommend? 3.) What effect, if any, would HVC’s willingness to commit an additional $100,000 during the first year have on the recommended percentage of each project that HVC should fund? 4.) What would the capital allocation plan look like if an additional $100,000 is made available? 5.) What is your recommendation as to whether HVC should commit the additional $100,000 in the first year?
Constraints
So for the decision variables and constraints, we look at this model: | Security Systems | Plus | Market Analysis | | Year 1 | 600,000(x) | + | 500,000(x) | ≤ 800,000 | Year 2 | 600,000(x) | + | 350,000(x) | ≤ 700,000 | Year 3 | 250,000(x) | + | 400,000(x) | ≤ 500,000 |
Both project teams asking price are as shown, for instance in year 1,
1. UGC estimated that it would need C$150 million to carry out its strategic plans over the coming two years. Will its internal resources provide reliable funding for this program? How much external funding might it need? The company needs to spend C$150 million, which covers the installation of high-throughput elevators (7 or 8 more at $9 million each) and the upgrades of 15 elevators at $3 million each. The rest of the money is needed for the funding of the expansion of Crop Protection Services and Livestock services division.
c) What will be the required return on equity (rE) after the change in capital structure from part b?
__________ says to forecast the firm’s cash flows, and analyze the incremental cash flows of alternative decisions.
10. What is the net present value (NPV) of a long-term investment project? Describe how managers use NPVs when evaluating capital budget proposals.
The present value of the net incremental cash flows, totaling $5,740K, is added to the present value of the Capital Cost Allowance (CCA) tax shield, provided by the Plant and Equipment of $599K, to arrive at the project’s NPV of $6,339K. (Please refer to Exhibit 4 and 5 for assumptions and detailed NPV calculations.) This high positive NPV means that the project will add a significant amount of value to FMI. In addition, using the incremental cash flows (excluding CCA) generated by the NPV calculation, we calculated the project’s IRR to be 28%. This means that the project will generate a higher rate of return than the company’s cost of capital of 10.05%. This is also a positive indication that the company should undertake the project.
4. What kind of debt (agency debt, bank debt, or Rule 144a bonds) should the sponsors of the project use to fund the deal? What are the advantages and disadvantages of each kind of debt? In your view will project bonds receive an investment grade rating? What is the“weakest link” of the project? How can they improve the likelihood of getting an investment grade?
4. How should Pioneer set capital budgeting criteria for different projects within a given division? What distinctions among projects might be captured in these criteria? How should the different standards be determined?
3. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?
The group project, Macmillan and Grunski Consulting, consists of two sections. The first part explains the case about discounted cash flow analysis, by answering the given nine questions. The second part discusses the retirement planning.
2. New bank credit facility, 600 million cash on hand to take advantage of opportunities that may arise
$50,000 for an annual contract, it should invest $450,000 to individuals who extract value from
Question 2. Evaluate the manner in which Randall and Hubbard have implemented their investment center concept. The pitfalls did they apparently not anticipate.
Mayfield charged a budget-based management fee to appeal to potential LPs. Because industry practice was traditionally a 2/20 based fee, Mayfield had a competitive advantage against other VCs as the budget-based fee was attractive because:
2. Use the projections provided in the case to compute the incremental cash flows for the PCB project. Provide a reasonable estimate for cash flows after 2009 as well.
(RQ 3-12): In the last decade there has been a shift towards the direct transfer of funds from investors to the corporate sector. Examine some of the reasons for this trend.