QUESTION 2

Some while ago, a venture capital partnership provided a small amount of initial funding to HomeSea a start-up company who acquired a lightbulb business who went into insolvency. The intent was to integrate novel technology to make lightbulbs smart through the Internet of Things in the private homes market. The intent was to allow the start-up firm to establish initial versions of its products, and to test and prepare them for viable commercial use.

HomeSea now believes that a core product is ready for market, and, from January 1st 2023, it plans to begin sales in one of two potential entry markets: (A), the European Union; or (B), North America. The view is that it would be beyond the management resources available to the firm to launch the product in both markets simultaneously, even if that seemed profitable on the surface.

HomeSea chose the second of those markets (B), North America - where the start- up firm would seek to develop market share through selling its product through major house builders. The rationale for this is not available.

The venture capital partnership is willing to commit an additional 25 million to the

1 buy-in inventories of components from suppliers, and undertake a marketing program.

start-up firm.

This would allow the start-up firm to establish a small assembly facility,

For simplicity, you may assume that the 25million is paid on January 1st 2023 although, in practice, some of the money would be paid earlier than that date. A venture capital partnership could be expected to provide funding in a number of blocks or tranches, with payment of each one dependent on the achievement of particular milestones relating to such as stage of product development, identification of suitable markets, acceptance of the product by opinion- shaping customers, market share, and early indications of profit potential.

The owner of the start-up company believes that this 25 million in capital will be sufficient to allow them to assemble and sell a gradually increasing quantity of product, as set out below:

2023: 2024: 2025: 2026: 2027:

T otal:

120,000 units 160,000 units 220,000 units 310,000 units 380,000 units

1,190,000 units

They hope the business may be able to generate the following levels of annual operating profit to meet the business-growth requirements of the venture-capital partnership and to provide a reward for their efforts and intellectual capital in developing the new product2:

2023: 2024: 2025: 2026: 2027:

They expect year between 2023 and 2027. In addition, each unit of production will incur variable costs of 2.25. These are engineering estimates of the amounts of various components needed to assemble the product, and the cost of assembly itself.

Required

a) Calculate the desired annual sales revenue for the start-up firm for each year from 2023 to 2027 inclusive.

AND

b) Assume the feasible selling price per unit of product in the North American market is the $ equivalent of 24. Also, that the total size of the market for 2023 will be 2,100,000 units, rising at a rate of 8% per annum thereafter. Calculate the required market share (in %age form) as of 2027 to achieve the objectives of HomeSea and the venture capital partner.

AND

c) You should write a report to the management of HomeSea discussing the results of the accounting computations.

AND

d) In the same report, you should explain to the management of HomeSea how they may positively engage in the uncertainties associated with launching a product with uncertain means and ends, in an uncertain new market.