Hart Venture Capital (HVC) specializes in provding venture capital for software devlopment 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 Security Systems stock, the firm has asked HVC to provide $600,000 in year 1, $600,000 in year 2, and $250,000 in year 3. In exchange for Market Analysis stock, the firm has asked HVC to provide $500,000 in year 1, $350,000 in year 2, and $400,000 in year 3. However, because of other investments, they are willing to commit at most $800,000 for both projects in the first year, at most $700,000 in the second year and $500,000 in the third year.
HVC's financial analysis team reviewed both projects and recommended that the company's objective should be to maximize the net present value of the total investment in Security Systems and Market Analysis. The net present value takes into account the estimated value of the stock at the end of the three-year period as well as the capital outflows that are necessary during each of the three years. Using an 8% rate of return, HVC's financial analysis team estiamtes that 100% funding of the Security Systems has a net present value of $1,800,000, and 100% of the Market Analysis has a net present value of $1,600,000.
HVC has the option tot fund any percentage of the Security Systems and Market Analysis projects.
a) What is the recommended percentage of each project that HVC should fund and the net present value of the total investment?
b) 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?
c) 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?
d) What would the capital allocation plan look like if an additoinal $100,000 is made available?