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Shripal Shah Case Study #1 Hart Venture Capital Prof. Marian Reiff University of Redlands, Riverside Campus
CAUSES OF THE PROBLEM HVC has two firms to invest with which are equally competent: 1. Security systems: They need additional capital to develop an internet security software package.
2. Market analysis: they need additional capital to develop a software package for
conducting customer satisfaction surveys. Company Security systems Market Analysis HVC Year 1 $ 600000 $ 500000 $ 800000 Year 2 $ 600000 $ 350000 $ 700000 Year 3 $ 250000 $ 400000 $ 500000
Net present value of Security systems is $ 1800000 and market analysis is $ 1600000. DECISION CRITERIA AND ALTERNATIVE SOLUTIONS The decision criteria for choosing the investment are maximizing net present value. So the alternatives HVC had was Make proportionate investments in both the alternatives Invest completely in security systems or market analysis
RECOMMENDED SOLUTION When HVC invests in 60.87% of Security Systems project and 86.95% of Market Analysis project, HVC maximizes its net present value to $2486860. At this investment rate, I find that, there is some slack which is of negligible value, in the first and third years. This slack results from inaccuracy due to rounding off. If there is no rounding off, there will not be any slack in the first and third years. So the slack in the first and third years are neglected while making recommendations. The slack fund of $30455 available in the second year may be reinvested in lucrative options available with HVC.
Investment Pattern: Year 1 Security systems Market Analysis Slack Funds $ 365220 $ 434750 $ 30 (negligible) Year 2 $ 365220 $ 304325 $ 30455 Year 3 $ 152175 $ 347800 $ 25 (negligible)
Managerial Report
1. When HVC invests in 60.87% of Security Systems project and 86.95% of Market
Analysis project, HVC maximizes its net present value to $ 2486860. The slack fund of $30455 available in the second year may be reinvested in lucrative options available with HVC.
2. Capital Allocation Plan:
Year 1 Security systems Market Analysis Slack Funds $ 365220 $ 434750 $ 30 (negligible)
3. Assuming that the additional $100000 is made available to HVC to be invested in any
year, HVC should choose to invest these funds in these proportions in the two projects the following effects will take place (Refer graph 1.2):
a. % invested funded for Security Systems will become 68% b. % invested funded for Market Analysis will become 82% c. Net Present Value will become $2536000
Capital Allocation Plan: Year 1 $ 408000 $ 410000 $ 82000 Year 2 $ 408000 $ 287000 $ 5000 Year 3 $ 170000 $ 328000 $ 2000
4. Assuming the additional $100000 is committed for the first year itself, the capital allocation plan is as shown in point 3 of this section.
5. As we saw in point 3 of this section, when an additional $100000 is invested, the net
present value goes up by $49140 with a slack of $89000. These slack funds may be reinvested in lucrative options available with HVC.