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HART VENTURE CAPITAL

GROUP NO. 4

DILIP T P (9074)

GANESH V (9075)

MARIA VINEETHA ANTONY (9085)

RUBIN S CHERIAN (9101)

SHARAD KANDOI (9105)

DATE: 07/01/10

EXECUTIVE SUMMARY

HART Venture capital specializes in providing venture capital for software devolepment and

internet applications. Currently HVC has two investment oppurtunities.

1. Security Systems

2. Market analysis

They have reviewed both the projects and HVC’s objective is to maximize the net present

value of the total investment. HVC has the option to invest in both the projects in a certain

ratio or invest in either of the two, whichever meets the objective of maximizing net present

value.

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STATEMENT OF THE PROBLEM

The dilemma faced by HVC is to either invest in both the projects in a certain proportion or

to invest in any of the two. HVC believed that both the investment opportunities were worth

pursuing.

So the alternatives HVC had was

• Make proportionate investments in both the alternatives

• Invest completely in security systems or market analysis

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 Year 1 Year 2 Year 3

Security systems $ 600000 $ 600000 $ 250000

Market Analysis $ 500000 $ 350000 $ 400000

HVC $ 800000 $ 700000 $ 500000

Net present value of Security systems is $ 1800000 and market analysis is $ 1600000.

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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 (Refer graph

1.1). At this investment rate, we 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 Year 2 Year 3

Security $ 365220 $ 365220 $ 152175


systems

Market $ 434750 $ 304325 $ 347800


Analysis

Slack Funds $ 30 $ 30455 $ 25


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(negligible) (negligible)

EXTERNAL SOURCING

• Theory and problems of matrices by Frank Ayres, Jr (Schaum’s Outline Series)

• www.wikipedia.com

• http://www.akiti.ca/SimEq4Solver.html

• Introduction to management science by Bernard W Taylor III (Pearson Edition)

END OF CASE QUESTIONS

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 Year 2 Year 3

Security $ 365220 $ 365220 $ 152175


systems

Market $ 434750 $ 304325 $ 347800


Analysis

Slack Funds $ 30 $ 30455 $ 25

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(negligible) (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 Year 2 Year 3


Security systems $ 408000 $ 408000 $ 170000
Market Analysis $ 410000 $ 287000 $ 328000
Slack Funds $ 82000 $ 5000 $ 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.

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