#3. (10pts) Orchid Biotech Company is evaluating several devel The company has t

Question

#3. (10pts) Orchid Biotech Company is evaluating several devel The company has the come up with the following estimates of the initial capital requirement, and- lopment projects for experimental drugs projects. Given a wide varlety of staffing needs, the company has also estimated the number of research scientists required for each development projects (all numbers are in million dollars). Show your work Project Number Initial Capital $10 15 15 20 30 Il of Research Scientists $10.1 19.0 22.0 25.0 60.2 1) (Spts) Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these project? 2) (5pts) Suppose in addition that Orchid currently has only 12 research scientists and does not anticipate being able to hire any more in the future. How should the company prioritize these projects?

Explanation / Answer

#3

1.

We need to find out the profitability Index (PI) for prioritizing the projects

Profitability Index = NPV/Initial Capital

PI for Project I = 10.1/10 = 1.01

PI for Project II = 19/15 = 1.2667

PI for Project III = 22/15 = 1.4667

PI for Project IV = 25/20 = 1.25

PI for Project V = 60.2/30 = 2.0067

So, priority will be highest for Project V, then Project III, then Project II, then Project IV and at last Project I.

Provided, the budget is $60 million,

$30 million will go for Project V, Balance will be = 60 -30 = 30 million

$15 million will go for Project III, Balance will be = 30 - 15 = 15 million

$15 million will go for Project II, Balance will be = 15 - 15 = 0

2.

We need to find out the profitability Index (PI) in regard to number of research scientists, for prioritizing the projects

Profitability Index = NPV/Number of Research Scientists

PI for Project I = 10.1/2 = 5.05

PI for Project II = 19/3 = 6.3333

PI for Project III = 22/4 = 5.5

PI for Project IV = 25/3 = 8.3333

PI for Project V = 60.2/12 = 5.0167

So, priority will be highest for Project IV, then Project II, then Project III, then Project I and at last Project V.

Provided, the number of research scientists is 12,

3 research scientists will work for Project IV, Balance will be = 12 -3 = 9

3 research scientists will work for Project II, Balance will be = 9 - 3 = 6

4 research scientists will work for Project II, Balance will be = 6 - 4 = 2

2 research scientists will work for Project I, Balance will be = 2 - 2 = 0

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