Hart Venture Capital (HVC) specializes in providing venturecapital for software development and Internet applications.Currently HVC has two investment opportunities: (1) SecuritySystems, a firm that needs additional capital to develop anInternet security software package, and (2) Market Analysis, amarket research company that needs additional capital to develop asoftware package for conducting customer satisfaction surveys. Inexchange for Security Systems stock, the firm asked HVC to provide$600,000 in year 1, $600,000 in year 2, and $250,000 in year 3 overthe coming three-year period. In exchange for Market Analysisstock, the firm asked HVC to provide $500,000 in year 1, $350,000in 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, HVC is willing to commit atmost $800,000 for both projects in the first year, at most $700,000in the second year, and $500,000 in the third year. HVC’s financialanalysis team reviewed both projects and recommended that thecompany’s objective should be to maximize the net present value ofthe total investment in Security Systems and Market Analysis. Thenet present value takes into account the estimated value of thestock at the end of the three-year period as well as the capitaloutflows that are necessary during each of the three years. Usingan 8% rate of return, HVC’s financial analysis team estimates that100% funding of the Security Systems project has a net presentvalue of $1,800,000, and 100% funding of the Market Analysisproject has a net present value of $1,600,000. HVC has the optionto fund any percentage of the Security Systems and Market Analysisprojects. For example, if HVC decides to fund 40% of the SecuritySystems project, investments of would be required in year 1, wouldbe required in year 2, and would be required in year 3. In thiscase, the net present value of the Security Systems project wouldbe . The investment amounts and the net present value for partialfunding of the Market Analysis project would be computed in thesame manner. Managerial Report Perform an analysis of HVC’sinvestment problem and prepare a report that presents your findingsand recommendations. Be sure to include information on thefollowing: The recommended percentage of each project that HVCshould fund and the net present value of the total investment Acapital allocation plan for Security Systems and Market Analysisfor the coming three-year period and the total HVC investment eachyear The effect, if any, on the recommended percentage of eachproject that HVC should fund if HVC is willing to commit anadditional $100,000 during the first year A capital allocation planif an additional $100,000 is made available Your recommendation asto whether HVC should commit the additional $100,000 in the firstyear

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