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 financial analysis team reviewed both projects andrecommended that the company’s objective should be to maximize thenet present value of the total investment in Security Systems andMarket Analysis. The net present value takes into account theestimated value of the stock at the end of the three-year period aswell as the capital outflows that are necessary during each of thethree years. Using an 8% rate of return, HVC’s financial analysisteam estimates that 100% funding of the Security Systems projecthas a net present value of $1,800,000, and 100% funding of theMarket Analysis project has a net present value of $1,600,000.

HVC has the option to fund any percentage of the SecuritySystems and Market Analysis projects. For example, if HVC decidesto fund 40% of the Security Systems project, investments of 0.40($600,000) = $240,000 would be required in year 1, 0.40 ($600,000)= $240,000 would be required in year 2, and 0.40 ($250,000) =$100,000 would be required in year 3. In this case, the net presentvalue of the Security Systems project would be 0.40 ($1,800,000) =$720,000. The investment amounts and the net present value forpartial funding of the Market Analysis project would be computed inthe same manner.

Perform an analysis of HVC’s investment problem and prepare areport that presents your findings and recommendations. Be sure toinclude information on the following:

1. The recommended percentage of each project that HVC should fundand the net present value of the total investment
2. A capital allocation plan for Security Systems and MarketAnalysis for the coming three-year period and the total HVCinvestment each year
3. 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
4. A capital allocation plan if an additional $100,000 is madeavailable
5. Your recommendation as to whether HVC should commit theadditional $100,000 in the first year  

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