project on investment analysis

CAPTIAL BUDGETINGOF HARDWARE PRODUCTS KTwo Technologies, Bangalore

Industry Analysis – IT and ITES

IntroductionOver the past decade, the Information Technology (IT) industry has become one of the fastestGrowing industries in India, propelled by exports (the industry accounted for more than a quarterof India’s services exports in 2004-05). The key segments that have contributed significantly (96 Percent of total) to the industry’s exports include – Software and services (IT services) and IT enabled Services (ITES) i.e. business services. Over a period of time, India has established itselfas a preferred global sourcing base in these segments and they are expected to continue to fuelgrowth in the future.

RAMAIAH INSTITUTE OF MANAGEMENT SCIENCE, Bangalore 1


Evolution Of the industry

ITES evolution can be divided into four phases as follows:

o First Phase of Evolution: In the first phase of evolution of the ITES industry in India,

many MNCs established captive units in India for customer support and transaction processing. GE Capital Services (now Genpact) was the first Pioneer ITES in India in 1997 by setting call centre followed by British Airways, HSBC.

o Second Phase of Evolution: Third party units were set up in India by MNCs, Non

Indian Residents (NRIs), and Indian independents like Wipro, Infosys, and Satyam in 2002.

o Third Phase of Evolution: ITES industry in India has been characterized trend towards

geographical dispersion of activities, mergers & acquisitions (M&As).Industry observers reported 574 M&As in 2003 and 353 in 2004.

o Fourth Phase of Evolution: In the current phase there is increasing trend towards

Indian companies acquiring small to medium size businesses in overseas locations. There is also the growing trend of niche players in industry verticals or specific business processes setting up BPO businesses.

Evolution in IT Software:

- 1968: The Tata industrial conglomerate forms software services unit Tata Consultancy Services.

- Mid-1970s: IBM exits India. Import duties of 150 percent or more mean that VCRs cost

$3,000 and TVs cost $6,000. Wipro starts to create India's first homegrown PC.

- 1991: National financial crisis causes government to introduce major reforms.

- 1993: A group of IT leaders determines plan for IT industry. Professor Deepak Phatak



predicts India's IT output will hit $100 billion by 2010. "Everyone thought that sounded

crazy, so we changed it to $50 billion by 2008," he said. The latter figure is on track.

- 1994: Telecom liberalized.

- 1995: TCS determines that its CasePac tool developed for IBM can be used to scan software

for Y2K problems. An industry is born.

- 1999: Y2K contracts pile into India.

- 2002: Indian companies expand hiring. Massive layoffs in US

- 2003: Led by service conglomerates such as Wipro and Infosys, India becomes a primary

Destinations for offshore outsourcing as foreign companies seek to lower cost.

The primary factors affecting the IT industry are as follows:

o Cost (Cost of labor, infrastructure and Forex rates).

o Labour Competitiveness (Pool of labor, Level of Education,Skills,Fluency in English

Language)

o Other factors like Geographical location, Political influence, tax regime and regulatory

conditions such as data security.



Global Comparison

India is expected to be preferred destination for ITES services. Its current share of 46%of Global ITES market may be challenged by a number of countries, most notably China, Philippines, and Malaysia. China may become India’s principal competitor, but India’s supply of qualified labor also seems to increase over the next decades. Between 2005 and 2020, the supply in India in age group 20-34 years should increase by around 66 million people i.e. 4.4 million per year which much higher than China.

A SWOT comparison (IT) of major developing economies has been done



Indian IT-BPO Industry - Sector-wise revenue break-up

USD billion FY2005 FY2006 FY2007 FY2008 FY2009E

IT Services 13.5 17.8 23.3 31.0 35.2

-Exports 10.0 13.3 17.8 23.1 26.9

-Domestic 3.5 4.5 5.5 7.9 8.3



BPO 5.2 7.2 9.5 12.5 14.8

-Exports 4.6 6.3 8.4 10.9 12.8

-Domestic 0.6 0.9 1.1 1.6 1.9

Engineering Services and R&D, Software Products

3.8 5.3 6.5 8.6 9.5

-Exports 3.1 4.0 4.9 6.4 7.3

-Domestic 0.7 1.3 1.6 2.2 2.3

Total Software and Services Revenues

Of which, exports are

22.5 30.3 39.3 52.0 59.6

17.7 23.6 31.1 40.4

47.0

Hardware 5.6 7.1 8.5 12.0 12.1

-Exports 0.5 0.6 0.5 0.5 0.3

-Domestic 5.1 6.5 8.0 11.5 11.8

Total IT Industry (including Hardware)

28.1 37.4 47.8 64.0 71.7

Notes: E: Estimates Figures may not add up due to rounding off. Source: NASSCOM



Some of the important aspects of the NASSCOM- McKinsey report related to the size of India's IT industry are –

o There is potential of 2.2 million people being employed in the IT industry of India by the

end of 2008.

o Contribution of software and services to the total GDP of India will be more than 7.5%.

o FDI (Foreign Direct Investment) of 4.5 billion US Dollars expected in the IT industry by

the end of 2008.

o 35% of total exports from India will be from IT exports. 225 billion US Dollars worth of

market capitalization from IT shares. Software and services are exported to bout 95

companies from India. North America accounts for 61% of the software exports from

India.



Growth in Revenues

Indian IT-BPO grew by 12 per cent in FY2009 to reach USD 71.7 billion in aggregate revenue. Software and services exports (includes exports of IT services, BPO, Engineering Services and R&D and Software products) reached USD 47 billion, contributing nearly 66 per cent to the overall IT-BPO revenue aggregate.

IT-BPO exports (including hardware exports) reached USD 47.3 billion in FY2009 as against USD 40.9 billion in FY2008, a growth of 16 per cent.

While the US (60 per cent) and the UK (19 per cent) remained the largest IT-BPO export markets in FY2008, the industry footprint is steadily expanding to other geographies - with exports to Continental Europe in particular growing at a CAGR of more than 51 per cent over FY2004-2008.

The industry’s vertical market exposure is well diversified across several mature and emerging sectors. Banking, Financial Services and Insurance (BFSI) remained the largest vertical market for Indian IT-BPO exports, followed by Hi-tech/Telecom which together accounted for 61 per cent of the Indian IT-BPO exports in FY2008.

Domestic IT market (including hardware) reached USD 24.3 billion in FY2009 as against USD 23.1 billion in FY2008, a growth of 5.3 per cent. Hardware grew at 2.6 per cent; Software and services spending supported by increasing adoption, grew by almost 8 per cent.

Direct employment in Indian IT-BPO crossed the 2.2 million mark, an increase of about 226,000 professionals over FY2008; indirect job creation is estimated at about 8 million.

IT services (incl. engineering services, R&D, Software products) exports, BPO exports and Domestic IT industry provides direct employment to 947,000, 790,000 and 500,000 professionals respectively.

As a proportion of national GDP, the sector revenues have grown from 1.2 per cent in FY1998 to an estimated 5.8 per cent in FY2009. Net value-added by this sector, to the economy, is estimated at 3.5-4.1 per cent for FY2009.

Exports - Contributing 66 per cent to the overall revenue aggregate, exports remained the mainstay of the Indian IT-BPO growth story. Software and services exports, accounting for over 99 per cent of the total exports, reached USD 47 billion and directly employed over 1.7 million professionals in FY2009.



o Broad-based growth across all the segments of IT services, BPO, Software

products and engineering services, is reinforcing India’s leadership as the key sourcing location for a wide range of technology related services with Increasing traction in RIM & Application management and widening service portfolios

o IT services (excluding BPO, product development and engineering services),

contributed 57 per cent to total exports to reach USD 26.9 billion.

o BPO services exports, up 18 per cent, was the fastest growing segment across

software and services exports driven by scale as well as scope. BPO service portfolio was strengthened by vertical specialization and global delivery capabilities.

o Complementing the strong growth in IT services and BPO exports was the

continued growth across Software product development and engineering services, which also reflected India’s increasing role in global technology IP creation. Export revenues from these relatively high-value-added services such as engineering and R&D, offshore product development and made-in-India software products grew at 15 per cent, and clocked USD 7.3 billion in FY2009.

Domestic

o In FY2009, domestic market (including hardware) grew at nearly 19

per cent in INR terms to reach INR 1,113 billion (USD 24.3 billion); domestic software and services market reached INR 572 billion (USD 12.5 billion).



Knowledge Professionals employed in the Indian IT-BPO sector

FY2005 FY2006 FY2007 FY2008 FY2009

IT Exp. & Services Exports

390,000 513,000 690,000 860,000 946,809

BPO Exports

316,000 415,000 553,000 700,000 789,806

Domestic Market

352,000 365,000 378,000 450,000 500,000

Total 1,058,000 1,293,000, 1,621,000 2,010,000 2,236,614

*Figures do not include employees in the hardware sector Source: NASSCOM

Knowledge Professionals

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

FY2005 FY2006 FY2007 FY2008 FY2009

Financial Year

Em

plo

ye

e S

tre

ng

th

IT Exp. & Services Exports BPO Exports Domestic Market

Scale:

X axis: 1 interval = 1 year

Y axis:1 interval = 1lakh professionals



Future Growth

• The global technology related spending is expected to reduce for the first 2-3 quarters of 2009 on account of the downturn but is expected to pick up in 2010.

• Greater focus on cost and operational efficiencies in the recessionary environment is expected to enhance global sourcing

• There would be pricing pressures coupled with contract renegotiations due to the economic

Uncertainty. India Inc would remain focused on tactical measures to achieve cost savings and greater productivity

• Services and software segments are estimated to cross USD 1.2 trillion by 2012. This is more than the 5.2 per cent growth expected in the total IT spending

• ITO market is expected to grow at a CAGR of 6.9 per cent and reach USD 275 billion

By 2012

• The huge potential for global sourcing is further highlighted by an addressable market size of USD 500 billion in 2008, which is more than five times bigger than the current market

• The industry will continue to diversify in terms of geographies, verticals and service lines

• SMEs (Small and Medium Enterprises) are expected to emerge as a significant opportunity due to lower IT adoption currently

• Lack of working age population in the developed economies and a significant long term cost arbitrage indicates India’s sustained cost competitiveness

• India Inc. is likely to increase its focus on developing a comprehensive risks framework and identify steps in managing them


CAPTIAL BUDGETINGOF HARDWARE PRODUCTS KTwo Technologies, BangaloreKTwo Technology Solutions

KTwo Technology Solutions is a products company driven by top team of professionals who possess experience and knowledge in rolling out innovative new products in international markets. Operating to harnesses the potential of Indian and Global talent pool to build and deliver world-class products tailored to varied budgets in a global market.

The key objective of the company is to build and consolidate products to create solutions that align high utility with value for the TCO. KTwo’s basket of products offers a point solution in itself or a combined bundle as a larger point solution. We also focus on building industry frameworks to serve as a basis for vertical solutions in niche industry segments.

Headed by Anant Koppar a visionary technology leader, KTwo is driven by a team of technologists and domain experts with extensive experience in rolling out new products in the market.

Mission

o To be a globally dominant product Brand in the industry and

segments of our choice by 2012

o Be a dream destination for every innovator to unleash their creativity by fostering a world

class environment

o Be a predominantly Employee Owned Organization

Values

o Highest Order of Ethical Business Practices

o Value Based Mutually Beneficial Relationship with all Stakeholders

o Recognition of Individual Brilliance within the context of Team - play

o Freedom to Innovate

o Tolerance for Failure - Concept of "Fast Fail"



KTwo specializes in products and solutions that complete the Last Metre connection in an information link. Last Metre Connectivity™ provides secure, reliable, high quality short range information transfer by means of wireless communication enabling substantial improvements in productivity and convenience. The concept of information anywhere, anytime and on any device is addressed by KTwo through its Last Metre Connectivity™ technology offerings.

The Company specializes in two segments

1. Product Engineering - The Company offers wide range of products using Digital Signal Processing Algorithms and Hardware.

2. Industry Solutions - Industry Solutions apply and extend the principles of standard application development methods to meet the specific requirements of enterprise software products and solutions in Health care, Logistics and Automotive.

Board of Directors:

It consists of 4 high profile professionals who possess rich experience in Industry.

1. Kalpana Koppar – Founder Director

Possess Diploma in Electronics & Telecommunication Engineering and worked for Bharat Heavy Electricals Ltd., Bangalore (BHEL) in various capacities in the Electronics Division for 9 years.

Co-founder & Managing Trustee of Utthana Charitable Trust founded in the year 1996 with a vision to create a community of business professionals committed to the sustainable development of initiatives aimed at constructively and efficiently aiding the under–privileged children to meet

their needs for a basic livelihood and education

2. Anant R Koppar – Chairman and CEO

A Serial Entrepreneur is the founder Chairman and CEO of KTwo Technology Solutions. Headed Mphasis Technologies, a division of Mphasis that provides software services to customers engaged in R&D and Product Development. He also Founded Kshema Technologies in 1997 and grew it to a high value niche services provider in 5 years and was also Co-founder and Head of Technology & Operations in BFL Software, responsible for acquiring marquee clients like Compaq, FedEx, AutoZone, etc. He possess Masters Degree in Computer Engineering from IIT-Kharagpur and a certified "Project Management Professional" by PMI, was the first CEO in India to get this certification



3. Prof S.Raghunath – Director

He teaches post–graduation and doctoral courses in Alliance Management, Strategic Networks and Corporate Strategy and Policy and leads the IIMB executive Program on Strategic Issues in Alliances, Acquisitions and Negotiations. He was a Visiting Scholar at the Graduate School of Business, Stanford University (1990 – 1991) where he engaged in research in strategy making in IT companies. He was also a visiting Professor at the University of Buckingham, UK and the RMIT School of Business Melbourne, Australia, INSEAD France.

He is also on the board of Academy of International Business (AIB) India Chapter and on the Boards of hi–tech companies and National Venture Fund. He is a Registered Consultant with the office of Project Services, UNDP, and New York.

Bhaskar Menon – Director

He is a seasoned senior executive with over two decades of experience and successful track record with global multi-nationals, including Citibank, Merrill Lynch and Mphasis Corp. He has worked in Asia, Europe, the Middle East, Africa and the United States in International Private Banking, Global Capital Markets & Asset Management, Internet Technologies & Electronic Distribution Platforms, and Information Technology & Business Process Outsourcing and more recently with the Private Equity and Venture Capital industry.

He was an angel investor and a founding executive of Mphasis Corp., where he was President – BPO until 2006. Mphasis was the seventh largest publicly – listed Indian IT & BPO company prior to its acquisition by EDS in 2006. Previously, he was Executive Director and Head of International of E–Citi for Citigroup.



Leadership Council:

1. Anant Koppar – Chairman and CEO.

2. K R Krishnamoorthy – Exec Vice-President.

3. Dayanand Yardi – Chief Finance Officer.

4. Srinidhi Srinath – Senior Vice President, Innovation and Product R & D.

5. Venkatesh Kulkarni – Senior Vice President, Head and Administration Facilities.

6. Uday Ramachandran – Senior Vice President, Automotive and Wireless.

7. Anand Amur – Senior Vice President, Enterprise Mobility and Wireless Product.

8. Paul Lombardo – Senior Vice President, Global sales and Marketing.

9. Sujatha Shenoy – General Manager, Human resources.

10. Aravind Padmanabhan – Vice President, Corporate Strategy and Planning.

11. H C Prasad – Vice President, Head Quality and Information System.

12. N.Rajmohan – Vice President, Business Development and USA Sales.

13. Jaithrith Pandurangi – General Manager, Delivery.

14. Kiran Patil –Associate Vice President, Healthcare products.

15. Muralidharan N R - Vice President, Delivery.



Important Facts about the company

During the period of 2 years company has achieved important milestones to launch itself into the business world.

1. Revenues of $1.58 Million in the First year, achieving the break even.

2. Employee Strength of 180+ potential resources.

3. Secured ISO 9001:2000 Certification.

4. Conducting business in both Product development and Industry solutions.

5. IT solution provider for Columbia Asia Healthcare Management Company.

6. Became the Member of Intel India Design House Program & Microsoft Embedded Partner

7. Attracted High-Net-Worth Individuals to invest in.



ORGANIZATION STRUCTURE



ORGNIZATION STRUCTURE AND ITS ANALYSIS

1. CHARMAIN AND CEO:

Heads the organization and controls the entire organization, he is assisted by

Following members of the team:

a. Strategy & Planning Portal Practice:

This division takes care of strategic planning of the organization it includes various activities like:

o Attract and please customers

o Stake out a market position

o Conduct operations

o Compete successfully

o Achieve organizational objectives

b. Global Sales / Marketing:

This division takes care of Global sales and marketing, it carries out activities like:

o Customer Support across Global i.e. currently has branches in London and

United States of America.

o Addition of new clients.

o Merchandising Products and Services.



c. Personal Secretary:

Performs various activities like:

o Updating Chairman about the Meeting Schedules.

o Maintaining dairy of activities of Chairman to be performed

o Alerts about important deadlines.

d. Human Resources:

Human Resource Management involves various activities like:

o Recruitment and Derecruitment.

o Orientation of Employees about Company policies.

o Training the employees.

o Performance Appraisal.

o Compensation and benefits.

o Career Development.

o Retaining Potential Employees.

STRENGTHS:

o Achieves coordination necessary to meet demands from customers

o Flexible sharing of human resources across products

o Suited to complex decisions and frequent changes in unstable environment

o Provides opportunity for both functional and product skill development.

o Best in medium-sized organizations with multiple products.



FUNCTIONAL DEPARTMENT STRUCTURE


Software Engineer

Software Engineer

Software Engineer

Software Engineer

TEAM LEADER TEAM LEADER

PROJECT MANAGER

ASSOCIATE DELIVERY MANAGER

DELIVERY MANAGER

VICE PRESIDENT, HEAD

SENIOR VICE PRESIDENT


Product Engineering

KTwo's expertise in developing high-technology products for global companies enables us to offer you an effective combination of technology skills and domain knowledge that you can leverage for product implementation and support. We are experienced in addressing complex business needs through innovative technology solutions

KTwo can offer you a range of services to support your products and solutions in the market. Based on your specific needs, we can design and implement a structured program to assume and deliver a comprehensive range of services over a defined timeframe meeting specific service-level agreements. KTwo will establish focused implementation groups with appropriate expertise, to derive the benefits of repeatability and improved efficiencies, with focus on cost minimization.

The company offers 7 products:

1. K-Speak– Hands Free Car Kit

2. C – Blue™ – The World’s Smallest Memory Footprint Bluetooth Protocol Stack

3. Krystalk™ – Wireless Audio Kit

4. CytoSight

5. SecureStart

6. Legion - Integrated Wireless Transaction Terminal

7. Bluetooth Modules & Starter Kit CE, FCC & BQB certified



Industry Solutions:

Industry Solutions apply and extend the principles of standard application development methods to meet the specific requirements of enterprise software products and solutions. Industry Solutions are provided to three main segments:

1. HealthCare:

KTwo's Healthcare enterprise solutions seamlessly link clinical, administrative and departmental systems across the whole spectrum of health services. Exclusive focus on the healthcare sector has allowed developing an unrivaled depth and breadth of experience to understand workflows and improve your business.

KTwo specializes in developing creative and expeditious solutions for healthcare enterprise with the most competitive technology and expertise. An enterprise may be a multi-provider medical centre, a major hospital or a large Area Health Service.

2. KTwo's expertise in Logistics domain includes:

o IT solutions for Express Delivery and Cargo Management.

o Zigbee based wireless tracking of consignments.

o Planning pick-up, hub management, sorting & dispatch.

3. KTwo offers products and solutions focused on the Automotive Industry:

KTwo’s products and solutions for the Automotive Industry include: In–Vehicle Entertainment Products

• Hands-Free Car Kit • Bluetooth Helmet

Security Products

• Biometric Ignition System • Heavy Vehicle Safety Device

Diagnostic Products

• Data logger



Technology Partners:

1. Indian Institute of Science, Bangalore.

2. Blue WiMediatooth SIG.

3. WiMedia

Industry partners:

1. Analog Devices.

2. The Intel India Design House Program.

3. Microchip design partner program.



Strengths, Weakness, Opportunities and Threats (SWOT) Analysis

Identifying Company Resource and Competitive Capabilities. Strength is something a company is good at doing or an attribute that enhances its competitiveness, which has classified into various forms as below:

1. A Skill or Important Expertise:

KTwo's hardware design team is fully equipped to offer board and designs from concept to a functional board to suit customer requirements. Hardware solutions address the latest challenges in hardware design and effectively support processor inter-communications and high-speed I/O and memory access operations while ensuring cost-effective PCB architecture and manufacturing testability.

KTwo's hardware design services comprise of a rich array of board designs, EVMs, Starter Kit, reference designs and FPGA based designs that cater to small footprint, and power optimized solutions to high-end VME/CPCI based systems that have been built to work in harsh environmental conditions.

The Company has excellent know how about Hardware concepts like Complex Board Designs

• Microprocessor and DSP based designs

• RF and Analog Design

• Complete System design and Reference Design

B.Skills in providing best product qualities:

KTwo has obtained ISO 9001 quality certification in term duration of 2 years of its emergence

And excellent service delivery to its customers

C.Excellent Merchandising Skills:

KTwo has made its presence across the globe for Asia region it delivers from Bangalore,

It has also division present in United Kingdom to cover Europe and located in United States of America to support the American region.



2. Valuable Physical Assets:

State-of-art facilities of KTwo enable it to deliver the products and services across the globe.

3. Valuable Human Assets:

KTwo has 180+ experienced professionals, Talented in both Software and Hardware Development which includes key functional areas like:

Digital Signal Processing algorithms:

Equipped with extensive domain knowledge and experience in the DSP Software arena, KTwo has executed many projects and applications in algorithm development, coding and hardware design.

Feasibility study of system and algorithms development based on product requirements.

Performance evaluation and MIPS-Memory optimization.

Customization to cater to specific architectures and platforms.

Integration of sub blocks and algorithms into the system.

Signal processing algorithm development and coding.

Embedded Applications:

With a successful track record in developing a variety of applications for automotive, consumer electronics, wireless, and audio/video KTwo's software team brings significant value to custom embedded application development efforts on popular RTOS platforms. KTwo has successfully executed many projects on embedded application implementation and integration. Further, the company has expertise on the following tools and technologies:

RTOS (VxWorks, QNX, eCos, Embedded Linux, etc)

Device Drivers

Protocol Stacks and IP Development

DSP Algorithms

5. Valuable Organizational Assets:



These includes the following

Revenues of US $ 1.58 Million in the first year; Breakeven in the first year itself

ISO 9001:2000 Certified

IT partner for Columbia Asia Healthcare Management Company

Member of Intel India Design House Program & Microsoft Embedded Partner

6. Competitive Capabilities:

Product Innovation Capabilities: The Company has wide range of products in both division of Hardware and Industry Solutions.

Hardware Division:

1. K-Speak– Hands Free Car Kit

• K – Speak is a Bluetooth® based solution for safe & easy use of mobile phones while driving

• Dashboard-mountable Unit

• K – Speak uses the car stereo speakers for output. A simple cable connected to the auxiliary input of the car stereo makes this possible

• Automatically mutes car stereo while making or answering calls

• Streams music from any mp3 player

2. C – Blue™ – The World’s Smallest Memory Footprint Bluetooth Protocol Stack

C - Blue™ is the Bluetooth® protocol stack certified for BQB Version 2.0

• Embedded and Embeddable Stack

• Complete Implementation in ANSI ‘C’

• BQB Version 2.0, 1.2, 1.1, 1.0b

• Single Source Code Base

• Small Foot Print(Less ROM / FLASH)

• KAL for easy Portability



• Low Memory Requirement (RAM)

• Supports Single or Multithread Applications (Configurable)

• Less MIPS Consumption

3. Krystalk™ – Wireless Audio Kit

KrysTalk™ Audio kit is a bi-directional wireless Audio device based on Bluetooth® technology.

• KTwo's KrysTalk™ Audio Kit provides a low cost, low power, small form factor, and short – range wireless audio solution.

• Headphone that is typically connected by cable can now be made completely wireless.

4. CytoSight :

CytoSight is integrated systems capable of digital image capture from Microscopes, assist in analysis, provides for composition of a report and communicate the report with embedded images over secure electronic media such as Email, Internet, LAN, WAN and also on to mobile phones.

CytoSight comprises of a digital camera connected to a Microscope and a CytOS Box which allows for storage and transmission of the images on a secure network. The CytoSight software is also capable of automatically enhancing the image quality and information content in the image before rendering it electronically for access at multiple locations, thereby enabling Tele-Pathology. For example, CytoSight can automatically recognize and count various types of blood cells.

5. SecureStart:



KTwo's Biometric Ignition System is a product designed to improve vehicle security by authenticating the users of the vehicle before ignition. The product has the ability to enroll valid users of the vehicle by storing their fingerprints in a database. The ignition is allowed to turn on only when there is a valid match of the fingerprint of the user and the one that is stored in the database. The product also provides an option for bypassing the biometric system in case of failure, or for any other reason.

6. Legion - Integrated Wireless Transaction Terminal:

KTwo's Legion handheld device addresses all Last Metre Connectivity™ needs of field personnel by GSM/CDMA capability along with features enabling biometric device, camera, card swipe and printer.

Last Metre Connectivity™ business transactions be it POD, Order entry, customer service or any other edge transaction need to be completed seamlessly; KTwo's 'Legion' an Enterprise Assistant, delivers unparallel number of business capabilities built into an easy-to-carry rugged device. Bundled with features that support, enhance and differentiate, the device delivers high performance voice and data services. It also doubles up as an RFID reader, has plug in capabilities for finger print scanner, card reader and thermal printer features which can be used in many Last Metre Connectivity™ Solutions.

7. Bluetooth Modules & Starter Kit CE, FCC & BQB certified:

Bluetooth® Modules can transform wired products into wireless products. These are ready–to–use radio / baseband modules that can be implemented in any kind of electronic device to provide a complete wireless solution.

K2BM6300 Bluetooth Module

K2BM6350 Bluetooth Module

K2BMMSP6150 Bluetooth Module

K2BMMSP6350 Bluetooth Module

Industry Solutions:



Industry Solutions apply and extend the principles of standard application development methods to meet the specific requirements of enterprise software products and solutions. Industry Solutions are provided to three main segments:

1. HealthCare:

KTwo's Healthcare enterprise solutions seamlessly link clinical, administrative and departmental systems across the whole spectrum of health services. Exclusive focus on the healthcare sector has allowed developing an unrivaled depth and breadth of experience to understand workflows and improve your business.

KTwo specializes in developing creative and expeditious solutions for healthcare enterprise with the most competitive technology and expertise. An enterprise may be a multi-provider medical centre, a major hospital or a large Area Health Service.

a. Laboratory Information Management Systems (LIMS).

b. RFID Based Asset Tracking System.

c. Hospital Information System (HIS).

d. Tele – Radiology.

e. Seamless Transfer of Information - Last Metre Connectivity™ for Healthcare.

f. Phlebotomy Solution.

2. KTwo's expertise in Logistics domain includes:



o IT solutions for Express Delivery and Cargo Management.

o Zigbee based wireless tracking of consignments.

o Planning pick-up, hub management, sorting & dispatch.

o Multi-modal shipping, tracking and Business analytics.

o Design and Development of Handheld systems for instant information for the field staff.

And for real time transactions with central systems.

o Mobility enablement of existing systems and last-meter connectivity of existing systems.

o Integrating and monitoring solutions for field force

o End-to-end product life cycle services.

o Deccan Cargo Logistic Private Limited

o Ceas Goa Limited ( Mining activity)

3. KTwo offers products and solutions focused on the Automotive Industry.



KTwo’s products and solutions for the Automotive Industry include: In–Vehicle Entertainment Products

• Hands-Free Car Kit • Bluetooth Helmet

Security Products

• Biometric Ignition System • Heavy Vehicle Safety Device

Diagnostic Products

• Data logger

4. Valuable Alliances:



Technology Partners

Indian Institute of Science, Bangalore

• The Institute has been able to make many significant contributions to research in frontier areas of science and technology. IISc has patents in innovative areas of imaging and compression technology.

• KTwo has partnered with the IISc to incorporate advances in imaging and compression technology in its products and offer the technology benefits to its partners and customers.

Bluetooth SIG

The Bluetooth Special Interest Group (SIG) is a trade association comprised of leaders in the telecommunications, computing, automotive, industrial automation and network industries that is driving the development of Bluetooth wireless technology, a low cost short-range wireless specification for connecting mobile devices and bringing them to market.

KTwo is an Associate Member of Bluetooth SIG WiMedia.The WiMedia Alliance is an open, non-profit industry association dedicated to collaboratively developing and administering specs from the physical layer up; enabling connectivity and interoperability for multiple industry-based protocols sharing the MBOA-UWB spectrum. WiMedia is the "Ultra in Wireless." The new WiMedia Alliance represents a combination of WiMedia with

The Multiband OFDM Alliance SIG (MBOA-SIG) - the two leading organizations creating UWB industry specifications and certification programs for consumer electronics, mobile and PC applications.

Industry partners



Analog Devices DSP Collaborative

DSP Collaborative from Analog Devices, Inc. (NYSE: ADI) is a world-leading semiconductor company specializing in high performance analog, mixed-signal, and digital signal processing (DSP) integrated circuits (ICs). Since ADI was founded in 1965, its focus has been to solve the engineering challenges associated with signal processing in electronic equipment.

KTwo has partnered with Analog Devices to port it Bluetooth stack & profiles on to the Analog Devices Blackfin platform

The Intel India Design House Program

India Design House Program is a voluntary membership program for companies innovating and designing with Embedded Intel Architecture Processors or Intel XScale processors.

Healthcare

KTwo is a valued member of The Intel India Design House Program and offers products on the Embedded Intel Architecture Processors

Microchip design partner program

KTwo has supported the PIC range of microcontrollers since 1996 and is a Microchip Design Partner member. We are committed to providing product solutions based on the Microchip PIC range of microcontrollers and support products.

Focus areas for KTwo are Healthcare, Automotive & Enterprise Mobility; they have designed Bluetooth modules along with Microchip

Weakness:



New entry to Product Line – The Company is new entrant into the industry with 2 years of

background experience.

Market Opportunities:

1. Openings to win market share from rivals:

KTwo has specialized itself in Hardware products involving Bluetooth technology, the next generation technology in the field of Medicine like CytoSight for blood cells examination. It also includes various products like K-Speak, useful device that controls the environment of the car assisting the driver to answer the calls. It competes with some Industry Giants like Pioneer, Low Chinese products.

2. Expanding into new Geographic Locations:

Added 13 new clients in United States of America and United Kingdom. KTwo has expanded Sales team worldwide in London and California

3. Utilizing existing company skills and technological know how:

KTwo is working in the ultra wideband (UWB) technology and intends to offer products and solutions in the following areas:

• Wireless AV and home theatre systems

• Wireless video conferencing

• Wireless digital media transfer between portable devices

• Wireless gaming devices

• High-speed, short-range wireless PANs

• High-speed wireless printing

• High-resolution location finding

• Imaging in Medical, Industrial and Security systems

External Threats:



1. Slowdowns in Market growth:

With the current Global Recession the company predicts slow growth in profits when compared to previous years & Low cost Chinese Product

2. Strong Rivalry in Technological front:

As many companies are converging into Bluetooth technology and innovating products in field of:

o Imaging in Medical, Industrial and Security systems

o Wireless video conferencing

o Wireless digital media transfer between portable devices

CAPTIAL BUDGETING



A typical CAPTIAL BUDGETING decision involves commitment of large, initial cash outlay with the benefits spread out in time. The time to recoup initial investment could be long. This makes it imperative for the firm to carefully plan its investments to attain the corporate objectives. Capital Investments are typically irreversible in nature or costly to get out. Unwarranted investments can jeopardize the financial well being of the firm. CAPTIAL BUDGETING deals with investment in real assets. A project requires a large, up front capital investment; generates cash flows for a specified period of time at the end of which the project can be liquidated. The liquidation value of assets at the end of the project life is called Salvage value. It should be noted that the term initial investment is a misnomer. The term is used even when the investment is spread over a number of years. It is indeed the case in many real life situations. A project is shown as a time line diagram below.

Time 0 1 2 N

___________________________________________________

Cash flow I CF1 CF2 …………………….. CFn

+ Salvage value.

Techniques for Evaluating CAPTIAL BUDGETING



Companies spend a great deal of time and money on new investments. Executives need measures of productivity of capital, which can be applied to distinguish good ones from bad ones. There are broadly two types of measures – some based on accounting income and some based on cash flows. The cash flow based measures can be further categorized as those that consider time value of money and those that don’t. Cash flow based measures that consider time value of money are called Discounted Cash Flow (DCF) techniques.

Return on Investment ROI is essentially a single period measure. Income is computed for a specified period and then divided by the average book value of assets of the same year

ROI= [EBIT (1- T) / Av. B.V of investment]

Where EBIT= Earnings before Interest and

T= Marginal Tax Rate

Av. B V= {Beginning Book value + Ending Book Value} / 2

A variant of the above formula is:

ROI = {Net Income / Average BV}

ROI computed by the second method will be higher if equity financing is substituted for debt financing. This is because less interest expense increases net income (PAT).To separate investment and financing decisions it is better to use the first method. Consider a one-year

project with an investment of Rs 1 million. The project is expected to generate Rs 400, 000 in

pre tax earnings. The applicable tax rate is 36 % and the salvage value of the project is Rs 600,000.

ROI = [400000 (1- 0.36) / 800000]

= 32 %

Note: that ROI is a percent return measure. Now consider a multi period project which has a life of 5 years.

Example2:



Initial investment = Rs 1 m

Salvage value = Nil

Life = 4 years

Depreciation is provided on Straight-line basis

Average earnings = [-40000 + 60000 + 100000 + 150000 +200000] / 5

= Rs 94000

Average Book Value of investment = [900000+700000+500000+300000+100000] / 5

= Rs 500000

ROI = (94000 / 500000) = 18.8 %

It can be seen that ROI computed under first method is almost twice that computed under second method. The rule is to accept the project if ROI > Cost of capital and reject if

ROI is < cost of capital

Limitations of ROI: As is evident, ROI is a function of earnings and book value of investment. Both the numerator and the denominator are affected by accounting practices. Changing the method of depreciation or inventory costing will affect earnings and ROI. ROI typically understates return in early years and overstates return in later years. This is because the asset base is getting depreciated. In fact, ROI can increase for the same or lower earnings simply because the asset is being depreciated and becomes infinite when the denominator is zero! ROI

does not consider time value of money in case of multi year projects. No distinction is made

between earnings in first year and earnings in the last year. Further, ROI is an accrual accounting return whereas cost of capital is an economic return based on cash flows demanded by investors. The two cannot be compared.


Cash flow = EBIT (1-T) + Depreciation – Capital Expenditure – (+) increase (decrease) in working capital.


Cash flow Based Measures

As the name itself suggests, these are based on cash flow rather than accounting income. Accounting earnings suffer from credibility problem. In the absence of real performance improvement, accountants may accelerate revenues and defer costs, leading to overstatement of true profits. Earnings and cash flow, though related, measure different things. Cash flow is the net of cash inflows and outflows within a time period. Earnings, on the other hand, are the net of inflows and outflows from completed operating cycles. Cash flow measures inflows and outflows within a period regardless of the state of operating cycle. Earnings measure inflows and outflows from operating cycles that the business has completed regardless of when the cash flow occurs. Put another way, there may be no cash flow even when there is a profit because profit is recorded on accrual basis.

It is inappropriate to value earnings per se. You must also take into account the investment in fixed assets and working capital required to generate a given level of earnings. It is for this reason cash flows are used to value projects.

To arrive at cash flow from earnings:

A. Add non cash charges like depreciation and amortization that reduce net income but not affect cash flow

B. Deduct investment in working capital and capital equipment in that year.

These cash outflows are not reflected in the net income as they are taken to the balance sheet. For instance, investment in inventory is not charged off to arrive at net income. But there is a cash outflow to bring the inventory to its present position. Monies would have been spent on raw materials, wages etc. Since the inventory has not been sold, no revenue or profit is recorded.



Payback Period: this is one of the simplest ways of measuring an investment’s worth. It is

the length of time required to recoup initial investment. Payback period is expressed in years. The rule is to accept those projects that have a payback period less than the limit set by the management. Although all textbooks on Corporate Finance have declared that using payback period criterion is Neanderthal, some managers still use it. Some use it as a secondary criterion.

Year 1 2 3 4 5

NOPAT (40000) 60000 100000 150000 200000

Depreciation 200000 200000 200000 200000 200000

As there is no capital investment in any year, cash flow = NOPAT + Depreciation

The cash flow in last year should include salvage value of Plant and equipment, working capital etc. In the above example salvage value is zero and hence not considered.

Limitations of the Payback rule: Although it is based on cash flows, time value of money is ignored. Cash flow in year 1 is considered on par with cash flow in any other year. It considers cash flows up till the investment is recouped. But it ignores cash flows that occur after that. So a project that generates substantial cash flows in the later years may be discarded in favor of another project that generates higher cash flows in the initial years even if the former makes more economic sense. Often projects with shorter payback are considered less risky. There is usually not much correlation between risk and payback. A project that has a shorter payback may be riskier than a project with longer payback.



Discounted Cash flow Measures (DCF)

The rules considered so far do not consider time value of money. Discounted cash flow measures are based on cash flows and explicitly consider time value of money. There are 3 DCF measures

Net Present Value (NPV)

Internal Rate of Return (IRR)

Discounted Pay Back

Net Present Value (NPV) The net present value of a project is the sum of the present values of expected project cash flows and the initial investment.

N

NPV = [CFt / (1+K) t] - Initial investment

t=1

Where CFt = cash flow in any year t

K = Appropriate discount rate, usually the weighted average cost of

Capital

t = year 1, 2,…….., n

Thus, NPV is the excess of present value of cash inflows over the initial investment. It is an absolute number expressed in rupees. The rule is to accept the project if NPV is > 0 and reject if NPV is < 0. A firm accepting a negative NPV project will be financially worse off. If the NPV is zero, the firm is neither better off nor worse off .To calculate NPV:

Estimate project cash flows

Choose an appropriate discount rate.

Calculate PV of project cash flows and deduct initial investment.



The calculation of NPV is based on certain assumptions.

Cash flows occur at the beginning or end of the period rather than continuously throughout the period

Cash flows are certain

NPV has certain properties:

It is in line with shareholder wealth maximization rule

It considers all cash flows unlike payback period

It is additive i.e., NPV (A+B) = NPV (A) + NPV (B). The NPV of two or more projects can be added.

It considers time value of money.

It assumes that all intermediate cash flows are reinvested at the discount rate (hurdle rate) consider a project that requires an initial investment of Rs 1 m. The expected cash flows are shown below. Assume that the appropriate discount rate is 15 %

NPV = [250000 / (1.15) + 300000 / (1.15) 2 + 400000 / (1.15) 3 + 500000 / (1.15) 4] –

10, 00,000

NPV = Rs – 6500.

As the NPV is negative, the project should not be accepted.

Limitations of NPV Although the NPV rule is conceptually sound, it has some limitations since it considers all cash flows, it is biased towards longer term projects are an absolute number. One can make the mistake of rejecting a project that has a slightly lower NPV by not asking what the initial investment is. A project that has an NPV of 150 might be better when compared to another with an NPV of 200 if the latter requires much higher investment.



Internal Rate of Return (IRR) The Internal rate of return is the discount rate at which present value of cash flows equals present value of cash outflows or NPV = 0 . The discount rate is calculated by trial and error. Note the similarity between IRR and Yield To Maturity (YTM) of a bond. The YTM of a bond is the discount rate that makes the present value of coupon and principal repayments equal to the market price of the bond.

IRR is the discount rate at which NPV = 0.

N

NPV = [CFt / (1+K) t] - Initial investment

t=1

The value of K in the above expression is the IRR.

The IRR for the previous example is shown below

Investment = Rs 10, 00,000

NPV = [250000 * PVIF (r, 1)] + [300000* PVIF (r, 2)] + [400000* PVIF (r, 3)]+ [500000 * PVIF (r, 4)] - Rs10,00,000 = 0

At r = 14 %, NPV = Rs 15950

At r = 15 %, NPV= - Rs 6500

IRR lies in the range 14 – 15 %

Discount rate 14 % NPV = 15950

IRR NPV = 0

15% NPV = - 6500



By trial and error, IRR =14 + [15950 / (15950 +6500)] %

= 14.71 %

Limitations of IRR: since IRR is a scaled measure, it is biased towards smaller projects. IRR assumes that intermediate cash flows are reinvested at IRR (> COC) during the life of the project. Competition may drive down earnings in the long run to normal levels. At times more than one IRR is obtained making decision difficult.

Discounted Payback It measures the time required for discounted cash flows to cover initial investment. Unlike the payback period, discounted payback period considers time value of money. The discount rate is the firm’s cost of capital.

Consider a project has an initial investment of Rs 700,000

Year Cash flow PV @ 15% Cumulative PV

1 160,000 139,200 139,200

2 260,000 196,560 335,760

3 300,000 197,400 533,160

4 350,000 200,200 733,360

5 400,000 198,800 932,160

Discounted Pay back = 4 Years (approximately)



CAPTIAL BUDGETING of Hardware Products

KTwo technologies has wide range of 7 Hardware products diversified into various areas of Medical, Industrial applications, Automotive sectors.

Problem Statement:

The project study involves CAPTIAL BUDGETING of two hardware products:

1. K-Speak

2. Wireless Kit

Through various Investment Methods

I. Non Discounted Cash flows

1. Return on Investment

2. Payback Period (PB)

II.Discounted Cash flows

1. Net Present Value (NPV)

2. Internal Rate of Return (IRR)

Business Model:

KTwo technologies has Buy – Build – Operate Model the company buys Hardware components that includes Circuit Boards, Memory Chips, Microprocessor and other Hardware Components from a private entity, modernizes it and Markets to its customers across the globe.

The company invests into various sources as initial outlay:

1. Raw materials (Circuit Boards, Memory Chips, Microprocessor and other Hardware Components)

2. Manufacturing Expenses.

3. Maintenance Expenses.

4. Labour Expenses (like Salary and other benefits)



The products are setup in Bangalore with 6 Engineers and Headed by Project Manager working for period 2years and Total Life Span of the Products are for span of 5 years.

The project cost Break up for product is as below:

Product

Initial investment 4 Crores

Selling Price per piece 75000

Manufacturing Expenses (40% of Selling Price) 3000

Maintenance Expenses (10% of Selling Price) 7500

Life Span (in Years) 4

Profit Margin (as % of Selling Price) 25-30%

Product Growth (Expressed as %) 10%

Fixed cost (18% of Selling Price) 75000000

Sales Volume (Pieces / Year) 10000

Labor Expenses 1960000

Variable Cost / Piece (Material+Labor+Miscellanous)

37500

* All figures are in Indian National Rupees (INR)



Important Assumptions involved in computation of Cash flows:

1. Depreciation - It is assumed that Depreciation is Straight Line method.

There Depreciation for the project is calculated as below:

Initial investment = 4 Crores.

Life Span (in years) = 4

Straight line Depreciation = Initial investment / Life span (in Years)

10000000= 4 Crores / 4

2. Inflation rate is kept at constant of 5%

3. Working Capital Ratio is calculated as 30%

4. Company Pays tax at rate of 34%

5. Real Cost of Capital involved in raising funds = 10%

6. Nominal Cost of Capital = 15.5%



Revenue Generation

The company is 2 years old and Revenue data is available for same period. Company forecasts the product life span = 5 years and Product Growth = 11% Per Annum. Using the figures for the

First two years as below:

cash flow analysis

year 0 1 2

initial investment -40000000

revenue 787500000 826875000

This equation is obtained by using Revenue for first 2 years.

y = 4E+07x + 7E+08

R2 = 1

The forecast for next three years are as follows:

year 0 1 2 3 4

initial investment -40000000

revenue 787500000 826875000 868218750 911629688

The New Regression formed is as below:

y = 16406x3 + 885938x2 + 4E+07x + 7E+08

R2 = 1

Note: CAPTIAL BUDGETING is done using above Equation.



Graphical representation of Revenue Generation for CytoSight

Revenue Generation

y = 16406x3 + 885938x2 + 4E+07x + 7E+08

R2 = 1

720000000

740000000

760000000

780000000

800000000

820000000

840000000

860000000

880000000

900000000

920000000

940000000

1 2 3 4

Time Period

Re

ve

nu

e



Graphical Representation of Net Cash Flows of CytoSight:

Net Cash Flows

(400,000,000)

(300,000,000)

(200,000,000)

(100,000,000)

-

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

1 2 3 4 5

Time Period

Ca

sh

Flo

ws

Series1

y = 7E+07x3 - 7E+08x2 + 2E+09x - 2E+09 R2 = 1

Regression obtained is as below:

y = 7E+07x3 - 7E+08x2 + 2E+09x - 2E+09

R2 = 1




CAPTIAL BUDGETING: Non Discounted Cash flows for CytoSight

1. Return on Investment

Average earnings= [ ] / 4

= Rs 217418747

Average Book Value of investment = [ ] / 4 = Rs

20000000

ROI = (217418747/ 20000000) = 108.7%

Findings and Recommendations:

It can be seen that ROI computed under first method is almost twice that computed under second method.

The rule is to accept the project if ROI > Cost of capital and reject if ROI is < cost of capital

In this product ROI>Cost of Capital we can accept the product.



Cash Flows for K-Speak

Year 0 1 2 3 4

Note: Derivation of Cash flows for product is included in APPENDIX -1

Payback Period:

In this project KTwo are investing in a project with an initial investment of Rs 4 Crores. The cash flows from the project are given below:

The payback period in this case lies in between 1st and 2nd years. If we assume that cash flows occur uniformly over the year:

Payback = 1 + [(40000000-199,487,500) / (408779375 – 199487500)]

=1.20 years i.e. 1 year and 2 months



II.Discounted Cash flows

1. Net Present Value Method:

Consider the project which has an initial investment of Rs 4 Crores. The expected cash flows are shown below:

Year 0 1 2 3 4

The company has discount rate of 15.5 %

NPV = Rs. 486,693,867

Findings and Recommendations

As the NPV is positive, the product should be accepted.

Note: For Computation of NPV for this project is also calculated Excel function NPV (), is included in APPENDIX -3.

2. Internal Rate of Return:



Project Cost = Rs. 4 Crores .The expected cash flows are shown below:

Year 0 1 2 3 4

Internal Rate of Return (IRR) is rate that equates the investment outlay with the present value of cash inflow received after one period. This also implies that rate of return is discount rate which makes NPV = 0.

Using Excel IRR function ()

Returns the internal rate of return for a series of cash flows represented by the numbers in values. These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. The internal rate of return is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.

Syntax: IRR (values, guess) A value is an array or a reference to cells that contain numbers for which you want to calculate the internal rate of return.

Values must contain at least one positive value and one negative value to calculate the internal rate of return. IRR uses the order of values to interpret the order of cash flows. Be sure to enter your payment and income values in the sequence you want.

If an array or reference argument contains text, logical values, or empty cells, those values are ignored. Guess is a number that you guess is close to the result of IRR.

Microsoft Excel uses an iterative technique for calculating IRR. Starting with guess, IRR cycles through the calculation until the result is accurate within 0.00001 percent. If IRR can't find a result that works after 20 tries, the #NUM! Error value is returned.

In most cases you do not need to provide guess for the IRR calculation. If guess is omitted, it is assumed to be 0.1 (10 percent).

If IRR gives the #NUM! Error value, or if the result is not close to what you expected, try again with a different value for guess.

The IRR obtained from this Excel Function =76%

The Project cost Break up for product is as below:



Product

Blue tooth Kit

Initial investment 2 Crores

Selling Price per piece 1000

Manufacturing Expenses (50% of Selling Price) 500

Maintenance Expenses (10% of Selling Price) 100

Life Span (in Years) 3

Profit Margin (as % of Selling Price) 60%

Product Growth (Expressed as %) 12%

Fixed cost (16% of Selling Price) 8000000

Sales Volume (Pieces / Year) 50,000

Labor Expenses 1740000

Variable Cost / Piece (Material+ Labor + Other Expenses)

500

* All figures are in Indian National Rupees (INR)

Important Assumptions involved in computation of Cash flows:



1. Depreciation - It is assumed that Depreciation is Straight Line method.

Depreciation for the project is calculated as below:

Initial investment = 2 Crores. Life Span (in years) = 3

Straight line Depreciation = Initial investment / Life span (in Years)

66, 66,667= 2 Crores / 3

2. Inflation rate is kept at constant of 5%

3. Working Capital Ratio is calculated as 30%

4. Company Pays tax at rate of 34%

5. Real Cost of Capital involved in raising funds = 10%

6. Nominal Cost of Capital = 15.5%

Revenue Generation

The company is 2 years old and Revenue data is available for same period.



Company forecasts the product life span = 3 years and Product Growth = 17% Per Annum. Using the figures for the

First two years as below:

year 0 1 2initial investment -20000000

revenue 52500000 55125000

Forecasting the Revenue for the Next three years by following Regression Model:

y = 3E+06x + 5E+07

R2 = 1

The forecast for next three years are as follows:

year 0 1 2 3initial investment -20000000

revenue 52500000 55125000 57881250

The New Regression formed is as below:

y = 65625x2 + 2E+06x + 5E+07

R2 = 1


Graphical representation of Revenue Generation for SecureStart



Revenue Generation

y = 65625x2 + 2E+06x + 5E+07

R2 = 1

49000000

50000000

51000000

52000000

53000000

54000000

55000000

56000000

57000000

58000000

59000000

1 2 3

Time Period

Reven

ue

Graphical Representation of Net Cash Flows of Wireless Kit:



y = 5E+07x3 - 4E+08x2 + 1E+09x - 1E+09

R2 = 1

(300,000,000)

(250,000,000)

(200,000,000)

(150,000,000)

(100,000,000)

(50,000,000)

-

50,000,000

1 2 3 4

Series1

Poly.(Series1)

Regression obtained is as below:

y = 5E+07x3 - 4E+08x2 + 1E+09x - 1E+09

R2 = 1


I. Non Discounted Cash flows:



1. Return on Investment:

Average earnings= [7380999+7970049+858855] / 3

= Rs 59, 84,901

Average Book Value of investment = [16666667+9999999+3333333] / 3

= Rs 74, 99,999

ROI = (59, 84,901/ 74, 99,999) = 79.7%


It can be seen that ROI computed under first method is almost twice that computed under second method. The rule is to accept the project if ROI > Cost of capital and reject if ROI is < cost of capital. Product can be accepted.

Cash Flows for Wireless Kit



Year 0 1 2 3

(256,250,000) 13,260,167 13,809,842 32,619,594

Note: Derivation of Cash flows for product is included in APPENDIX -2

2. Payback Period

This is one of the simplest ways of measuring an investment’s worth. It is the length of time required to recoup initial investment. Payback period is expressed in years.

In this project KTwo are investing in a project with an initial investment of Rs 3 Crores. The cash flows from the project are given below:

The payback period in this case lies in between 0th and 1st years. If we assume that cash flows occur uniformly over the year:

Payback = 0 + [(30000000-0) / (64314492 – 0)

=0.46 years i.e. 0 year and 5 months

The rule is to accept those projects that have a payback period less than the limit set by the management. Although all textbooks on Corporate Finance have declared that using payback period criterion is Neanderthal, some managers still use it. Some use it as a secondary criterion.

II.Discounted Cash flows:

Consider the project that requires an initial investment of Rs 3 Crores. The expected cash flows are shown below:



Year 0 1 2 3 4 5

The company has discount rate of 15.5 %

NPV = [64314492 / (1.155) + 67428217 / (1.155) 2 + 70697627 / (1.155) 3 + 74130509 / (1.155) 4 +178242207/ (1.155)5] – 3, 00, 00,000

NPV = Rs 17, 17, 33,694


As the NPV is positive, the project should be accepted.

Note: For Computation of NPV for this project is also calculated Excel function NPV (), is included in APPENDIX -3

2. Internal Rate of Return:

Project Cost = Rs. 3 Crores .The expected cash flows are shown below:

Year 0 1 2 3 4 5



Internal Rate of Return (IRR) is rate that equates the investment outlay with the present value of cash inflow received after one period. This also implies that rate of return is discount rate which makes NPV = 0.

Using Excel IRR function () Returns the internal rate of return for a series of cash flows represented by the numbers in values. These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. The internal rate of return is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.

Syntax IRR (values, guess) A value is an array or a reference to cells that contain numbers for which you want to calculate the internal rate of return.

Values must contain at least one positive value and one negative value to calculate the internal rate of return.

IRR uses the order of values to interpret the order of cash flows. Be sure to enter your payment and income values in the sequence you want.

If an array or reference argument contains text, logical values, or empty cells, those values are ignored.

Guess is a number that you guess is close to the result of IRR. Microsoft Excel uses an iterative technique for calculating IRR. Starting with guess, IRR cycles through the calculation until the result is accurate within 0.00001 percent. If IRR can't find a result that works after 20 tries, the #NUM! Error value is returned.

In most cases you do not need to provide guess for the IRR calculation. If guess is omitted, it is assumed to be 0.1 (10 percent). If IRR gives the #NUM! Error value, or if the result is not close to what you expected, try again with a different value for guess.

Using the above Excel function IRR =62%

Appendix 1:

Cash Flows Derivation for K- Speak:



Basic assumption

Initial investment 40000000

Project life(yr) 5

Selling price 2000

Variable Cost/unit 917.4

Fixed Cost 36000000

Depreciation 8000000

Sales Volume(Pieces) 75000

Inflation 5%

Working Capital ratio 30%

Tax rate 34%

Real Cost of Capital 10%

Nominal Cost of Capital 0.155 (15.5%)

CASH FLOW ANALYSIS



YEAR 0 1 2 3 4 5

INITIAL INVESTMENT

-40000000

REVENUE 157500000 165375000 173643750 182325938 191442234

LESS: VARIABLE COST

72245250 75857512.5 79650388.1 83632907.5 87814552.9

CONTRIBUTION 85254750 89517487.5 93993361.9 98693030 103627681

LESS: FIXED COST 36000000 37800000 39690000 41674500 43758225

LESS: DEPRECIATION

8000000 8000000 8000000 8000000 8000000

PROFIT BEFORE TAX

41254750 43717487.5 46303361.9 49018530 51869456.5

TAX 14026615 14863945.8 15743143 16666300.2 17635615.2

PROFIT AFTER TAX

27228135 28853541.8 30560218.8 32352229.8 34233841.3

ADD: DEPRECIATION

8000000 8000000 8000000 8000000 8000000

WORKING CAPITAL

47250000 49612500 52093125 54697781.3 57432670.3 0

LESS: INCREASE IN WORKING

CAPITAL

47250000 2362500 2480625 2604656.25 2734889.06 -57432670

NET CASH FLOWS -87250000 32865635 34372916.8 35955562.6 37617340.7 99666511.6

NPV Rs.59,933,462.61

IRR 37%

Appendix 2:

Basic Assumption

Initial investment 30000000



Project life 5

Selling price 5000

Variable Cost/Piece 2289.12

Fixed Cost 40000000

Depreciation 6000000

Sales Volume(Pieces) 50000

Inflation 5%

Working Capital ratio 30%

Tax rate 34%

Real Cost of Capital 10%

Nominal Cost of Capital 0.155

CASH FLOW ANALYSIS

YEAR 0 1 2 3 4 5

INITIAL INVESTMENT -30000000

REVENUE 262500000 275625000 289406250 303876563 319070391

LESS:VARIABLE COST

120178800 126187740 132497127 139121983 146078083

CONTRIBUTION 142321200 149437260 156909123 164754579 172992308

LESS:FIXED COST 42000000 44100000 46305000 48620250 51051262.5



LESS:DEPRECIATION 6000000 6000000 6000000 6000000 6000000

PROFIT BEFORE TAX 94321200 99337260 104604123 110134329 115941046

TAX 32069208 33774668.4 35565401.8 37445671.9 39419955.5

PROFIT AFTER TAX 62251992 65562591.6 69038721.2 72688657.2 76521090.1

ADD:DEPRECIATION 6000000 6000000 6000000 6000000 6000000

WORKING CAPITAL 78750000 82687500 86821875 91162968.8 95721117.2 0

LESS:INCREASE IN WORKING CAPITAL

78750000 3937500 4134375 4341093.75 4558148.44 -95721117

NET CASH FLOWS -108750000 64314492 67428216.6 70697627.4 74130508.8 178242207

NPV $171,733,694.25

IRR 62%

Appendix 3:

NPV () Function:

Calculates the net present value of an investment by using a discount rate and a series of future payments (negative values) and income (positive values).

Syntax NPV (rate, value1, value2…)

Rate is the rate of discount over the length of one period.

Value1, value2 ... are 1 to 29 arguments representing the payments and income.

Value1, value2 ... must be equally spaced in time and occur at the end of each period.



NPV uses the order of value1, value2 ... to interpret the order of cash flows. Be sure to enter your payment and income values in the correct sequence.

Arguments that are numbers, empty cells, logical values, or text representations of numbers are counted; arguments that are error values or text that cannot be translated into numbers are ignored.

If an argument is an array or reference, only numbers in that array or reference are counted. Empty cells, logical values, text, or error values in the array or reference are ignored.

Note:

The NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below.

If n is the number of cash flows in the list of values, the formula for NPV is:

N

NPV = Values I (1 + rate)

i=1

NPV is similar to the PV function (present value). The primary difference between PV

and NPV is that PV allows cash flows to begin either at the end or at the beginning of the

period. Unlike the variable NPV cash flow values, PV cash flows must be constant throughout the investment. For information about annuities and financial functions, see PV.

NPV is also related to the IRR function (internal rate of return). IRR is the rate for which NPV equals zero: NPV (IRR (...) ...) = 0.

For K – Speak:



Nominal Cost of Capital = 15.5%

NPV (rate, value1, value2, ...)

NPV (15.5%, “32865635:34372917:35955563:37617341:99666512”) + (- 87250000))

NPV = Rs. 59,933,463

For Wireless Kit :

Nominal Cost of Capital = 15.5%

NPV (rate, value1, value2, ...)

NPV (15.5%,”64314492:67428216.6:70697627.43:74130508.8:178242207.3”+ (-108750000))

NPV = Rs. 17, 17, 33,694

Appendix 4:

Nominal Cost of Capital = (1+ Real Cost of Capital)*(1+inflation rate)-1

For K-Speak and Wireless Kit:

Nominal Cost of Capital = (1+10%)*(1+5%)-1 = 15.5%

Excel Sheet formulas:

1. Revenue = Sales Volume * Selling Price * (1 + inflation rate) ^N

For K – Speak:



Revenue = 75000 * 2000 * (1 + 5%) ^ 1

= Rs. 157500000

For Wireless Kit:

Revenue = 50000 * 5000 * (1+5%) ^1

= Rs. 262500000

2. Working Capital = Revenue * Working Capital Ratio

For K – Speak:

Working Capital = Rs. 157500000 * 30%

For Wireless Kit

Working Capital = Rs. 262500000 * 30 %


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