HIGH MOUNTAIN TECHNOLOGIES Case Solution & Answer

HIGH MOUNTAIN TECHNOLOGIES Case Solution  

The NPV decide states that all undertakings which have a positive net present worth ought to be acknowledged while those that are negative ought to be dismisses. On the off chance that finances are constrained and all positive NPV ventures can’t be started, those with the high marked down worth ought to be acknowledged.

It is expected that in order to identify the most suitable investing option, the management ofthe company is evaluating two options;forNPV all the values are given in case and we just need to calculate the values of cash flows for project and then NPV. Furthermore, we calculated the NPV of both project and for the project GPS transmitter,we got a negative NPV and got positive NPV of Surveillance aircraft.

Recommendation

It is expected that the management of the company is concerned about the financial position and financial wealth of the company and wants to increase the financial situation of the company by increasing the number of potential investors. The management of the company is analyzing the two available options which are GPS transmitter and Surveillance aircraft; by evaluating both projects using the net present value method, it is concluded that Surveillance aircraft project is generating positive net present value and GPS transmitter project is producing negative net present value, which means undertaking the project which is generating positive net present value will be beneficial for the company as well as itwill also help the company with respect to its financials as undertaking the project with positive net present value will add significant value with respect to potential investors of the company. Therefore, in order to increase the value of the company and to attract the potential investors by increasing the financial wealth, it is recommended that Surveillance aircraft project is most suitable options as compared to the GPS transmitter project, and the management of the company should undertake that project

Avg. beta:				1.666
Avg. Tr. Spread				3.91%
Premium				5.00%
Cost of equity:				12%
Cost of debt:				2%
Cost of debt with floatation costs:				4%
weighat of equity				60%
weight of debt				40%
WACC:				7.91%
Surveillance aircraft
Beta:				0.403555
Cost of equity:				9%
Cost of debt:				8%
Cost of debt with floatation costs:				4%
weighat of equity				60%
weight of debt				40%
WACC:				7.6%

Cost of Capital		8%
Land		250000
Building		750000
Equipment		1500000
CCA land		10000			NPV =
CCA eqp		150000						$5,827,109.52
Increase in NWC		350000
Annual cash flows		1250000
Disp – land		450000
Disp – bldg		300000
Disp – eqp		150000
Cap gains tax – land		40000
Lost CCA bldg		-450000
Lost CCA eqp		-1350000
Decrease in NWC
Year	Units	Sales	CGS	Corp OH	Selling/Adm	CF before tax	Tax	CF after tax
								-2500000
1	250	15000000	13500000	750000	2500000	-1750000	-525000	-1225000
2	500	30000000	27000000	750000	2500000	-250000	-75000	-175000
3	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
4	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
5	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
6	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
7	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
8	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
9	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
10	1000	60000000	54000000	750000	2500000	2750000	825000	1925000
								1250000

Cost of Capital		8.00%
patent		1500000
software		1000000
CCA patent		375000			NPV =
CCA software								($2,215,821.05)
Increase in NWC		200000
Annual cash flows
Disp – patient		150000
Disp – software		100000
Capital gains tax – software
Lost CCA patent
Lost CCA software
Decrease in NWC
Year	Units	Sales	CGS	Corp OH	Selling/Adm	CF before tax	Tax	CF after tax
1								-2500000
2	5,000	2500000	1750000	250000	750000	-250000	-75000	-175000
3	5500	2750000	1925000	250000	750000	-175000	-52500	-122500
4	6050	3025000	2117500	250000	750000	-92500	-27750	-64750
5	6655	3327500	2329250	250000	750000	-1750	-525	-1225
6	7321	3660250	2562175	250000	750000	98075	29422.5	68652.5
7	7321	3660250	2562175	250000	750000	98075	29422.5	68652.5
8	7321	3660250	2562175	250000	750000	98075	29422.5	68652.5
9	7321	3660250	2562175	250000	750000	98075	29422.5	68652.5
10	7321	3660250	2562175	250000	750000	98075	29422.5	68652.5
	7321	3660250	2562175	250000	750000	98075	29422.5	68652.5
								450000

……………….

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