Question: Question 2: HART VENTURE CAPITAL

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; (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 System stock, the form has asked HVC to provide $600,000 in year 1, $600,000 in year 2, and $500,000 in year 3 over the coming three-year period. In exchange for their stock, Market Analysis has asked HVC to provide $500,000 in year 1, $350,000 in year 2, and $400,000 in year 3, over the same three-year period. HVC believes that both investment opportunities are worth pursuing. 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 recommends 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 estimates that 100 percent funding of the Security Systems project has a bet present value of $1,800,000 and 100 percent funding of the Market Analysis project as a net present value of $1,600,000.

HVC has the option to fund any percentage of the Security System and Market Analysis projects.