The Research group in the R&D department of a pharmaceutical company has complet
ID: 2653927 • Letter: T
Question
The Research group in the R&D department of a pharmaceutical company has completed the scientific work on a new product. The investment needed for development of this completed research into a marketable product is being proposed. The forecasted Revenue, COGS and SG&A are shown below in the beginning items of an income statement. A four year time span is to be used in the evaluation of the proposal with a MARR of 20%. The income tax rate is 25%, and the capital gains tax rate is 15%. The investment needed for the development effort will be $300,000 in year 0 and $200,000 in year 1. Neither of these is depreciable. The needed working capital related to this new product for each of the four years is $200,000 in year 0, $250,000 in year 1, $300,000 in year 2, $300,000 in year 3, and declines to zero by the end of year 4. The product line is expected to be saleable for $2,000,000 to another pharmaceutical company at the end of the fourth year. Consider its book value as zero at the end of four years Complete the Income Statement, prepare a cash flow statement, and evaluate the proposal using the present worth and internal rate of return criteria. Income Statement 0 1 2 3 4 Revenue $250,000 $275,000 $350,000 $300,000 COGS ($100,000) ($110,000) ($140,000) ($120,000) Gross Margin $150,000 $165,000 $210,000 $180,000 SG&A ($75,000) ($75,000) ($75,000) ($75,000) Year 1 Year 1 Investment $300,000 $200,000 Ending Value $2,000,000 EOY 4 MARR 20% Income Tax rate 25% Capital Gains Tax rate 15% The Research group in the R&D department of a pharmaceutical company has completed the scientific work on a new product. The investment needed for development of this completed research into a marketable product is being proposed. The forecasted Revenue, COGS and SG&A are shown below in the beginning items of an income statement. A four year time span is to be used in the evaluation of the proposal with a MARR of 20%. The income tax rate is 25%, and the capital gains tax rate is 15%. The investment needed for the development effort will be $300,000 in year 0 and $200,000 in year 1. Neither of these is depreciable. The needed working capital related to this new product for each of the four years is $200,000 in year 0, $250,000 in year 1, $300,000 in year 2, $300,000 in year 3, and declines to zero by the end of year 4. The product line is expected to be saleable for $2,000,000 to another pharmaceutical company at the end of the fourth year. Consider its book value as zero at the end of four years Complete the Income Statement, prepare a cash flow statement, and evaluate the proposal using the present worth and internal rate of return criteria. Income Statement 0 1 2 3 4 Revenue $250,000 $275,000 $350,000 $300,000 COGS ($100,000) ($110,000) ($140,000) ($120,000) Gross Margin $150,000 $165,000 $210,000 $180,000 SG&A ($75,000) ($75,000) ($75,000) ($75,000) Year 1 Year 1 Investment $300,000 $200,000 Ending Value $2,000,000 EOY 4 MARR 20% Income Tax rate 25% Capital Gains Tax rate 15%Explanation / Answer
Answer:
Year
0
1
2
3
4
Revenue
$ 250,000
$ 275,000
$ 350,000
$ 300,000
Less: COGS
$ (100,000)
$ (110,000)
$ (140,000)
$ (120,000)
Gross Margin
$ 150,000
$ 165,000
$ 210,000
$ 180,000
Less: SG&A
$ (75,000)
$ (75,000)
$ (75,000)
$ (75,000)
Profit before tax
$ 75,000
$ 90,000
$ 135,000
$ 105,000
Less: Tax @25%
$ (18,750)
$ (22,500)
$ (33,750)
$ (26,250)
Cash Flows after tax
$ 56,250
$ 67,500
$ 101,250
$ 78,750
Investment
$ (300,000)
$ (200,000)
Working Capital Investments
$ (200,000)
$ (50,000)
$ (50,000)
$ -
$ 300,000
Ending Value (Net of Cap. Gain Tax) =2000000*(1-15%)
$ 1,700,000
Net Cash Flows
$ (500,000)
$ (193,750)
$ 17,500
$ 101,250
$ 2,078,750
PVF (20%)
1.00000
0.83333
0.69444
0.57870
0.48225
PV =Net Cash Flows* PVF
$ (500,000.00)
$ (161,458.33)
$ 12,152.78
$ 58,593.75
$ 1,002,483.60
Net Present value = Sum of PVs
$ 411,771.80
IRR =
36.85%
The NPV of the Project is positive and IRR is more than it required rate of return, Hence the project is acceptable
Year
0
1
2
3
4
Revenue
$ 250,000
$ 275,000
$ 350,000
$ 300,000
Less: COGS
$ (100,000)
$ (110,000)
$ (140,000)
$ (120,000)
Gross Margin
$ 150,000
$ 165,000
$ 210,000
$ 180,000
Less: SG&A
$ (75,000)
$ (75,000)
$ (75,000)
$ (75,000)
Profit before tax
$ 75,000
$ 90,000
$ 135,000
$ 105,000
Less: Tax @25%
$ (18,750)
$ (22,500)
$ (33,750)
$ (26,250)
Cash Flows after tax
$ 56,250
$ 67,500
$ 101,250
$ 78,750
Investment
$ (300,000)
$ (200,000)
Working Capital Investments
$ (200,000)
$ (50,000)
$ (50,000)
$ -
$ 300,000
Ending Value (Net of Cap. Gain Tax) =2000000*(1-15%)
$ 1,700,000
Net Cash Flows
$ (500,000)
$ (193,750)
$ 17,500
$ 101,250
$ 2,078,750
PVF (20%)
1.00000
0.83333
0.69444
0.57870
0.48225
PV =Net Cash Flows* PVF
$ (500,000.00)
$ (161,458.33)
$ 12,152.78
$ 58,593.75
$ 1,002,483.60
Net Present value = Sum of PVs
$ 411,771.80
IRR =
36.85%
The NPV of the Project is positive and IRR is more than it required rate of return, Hence the project is acceptable
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