Using the template below, please provide answers in excel template One of your c
ID: 2789051 • Letter: U
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Using the template below, please provide answers in excel template
One of your colleagues pointed out that instead of starting construction before the FDA approval, the company can invest only $0.8 B next year (depreciated over 10 years) and delay the remaining $1.2 B investment (depreciated over 8 years) for two years until the drug gets approved. Only if the drug gets approved will Fosbeck proceed with the second stage investment, which will take place in three years. The sales will commence in four years at the level of $10 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 5 years – due to delay the company will lose two years of revenues. The probability of patent obsolescence remains the same as before – 5% each year.
What is the NPV of this two-stage investment?
Two-stage investment alternative can be evaluated by simply calculating the NPV for two different outcomes (FDA approval or not) and then finding the expected value. Alternatively a Monte Carlo simulation can be used (see below). To check your calculations look at expected NPVs found using these two approaches - they should be nearly identical.
Is the option to delay the project valuable? Explain. Please show excel formula and calculations using the template below.
CoGS ratio 15% growth 50% SGA $2.00 CapEx $2.00 Revenue1 $10.00 Project Life 10 years Tax rate 38% R&D $0.60 probability of approval 10% probability of obsolescence 5% WACC 12% Real Option Modification Depreciation CapEx 1 $0.80 10 years CapEx 2 $1.20 8 years Two-stage investment alternative can be evaluated by simply calculating the NPV for two different outcomes (FDA approval or not) and then finding the expected value. Alternatively a Monte Carlo simulation can be used. To check your calculations look at expected NPVs found using these two approaches - they should be nearly identical. Evaluating two outcomes separately If approved by FDA (project can still get obsolete in later years) Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Probability of Success Revenue Cost SGA R&D Depreciation EBIT Taxes Net Income OCF CapEx FCF NPV IRR If FDA does not approve (project fails) Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Probability of Success Revenue Cost SGA R&D Depreciation EBIT Taxes Net Income OCF CapEx FCF NPV IRR Expected NPVExplanation / Answer
If approved by FDA (project can still get obsolete in later years) Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Probability of Success Revenue 10.00 15.00 22.50 33.75 33.75 33.75 33.75 33.75 33.75 Cost 1.50 2.25 3.38 5.06 5.06 5.06 5.06 5.06 5.06 SGA 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 R&D 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Depreciation 0.08 0.08 0.08 0.23 0.23 0.23 0.23 0.23 0.23 EBIT 5.82 10.07 16.45 25.86 25.86 25.86 25.86 25.86 25.86 Taxes 2.21 3.83 6.25 9.83 9.83 9.83 9.83 9.83 9.83 Net Income 3.61 6.24 10.20 16.03 16.03 16.03 16.03 16.03 16.03 DF@12% 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 0.2875 0.2567 OCF 2.29 3.54 5.17 7.25 6.47 5.78 5.16 4.61 4.12 CapEx 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 FCF 0.29 1.54 3.17 5.25 4.47 3.78 3.16 2.61 2.12 NPV 0.29 1.54 3.17 5.25 4.47 3.78 3.16 2.61 2.12 IRR 1.61 4.24 8.20 14.03 14.03 14.03 14.03 14.03 14.03 If FDA does not approve (project fails) Year 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Probability of Success Revenue 10.00 15.00 22.50 33.75 33.75 33.75 33.75 33.75 33.75 Cost 1.50 2.25 3.38 5.06 5.06 5.06 5.06 5.06 5.06 SGA 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 R&D 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 Depreciation 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 0.08 EBIT 5.82 10.07 16.45 26.01 26.01 26.01 26.01 26.01 26.01 Taxes 2.21 3.83 6.25 9.88 9.88 9.88 9.88 9.88 9.88 Net Income 3.61 6.24 10.20 16.12 16.12 16.12 16.12 16.12 16.12 DCF 0.8929 0.7972 0.7118 0.6355 0.5674 0.5066 0.4523 0.4039 0.3606 0.3220 0.2875 0.2567 OCF OCF 2.29 3.54 5.17 7.29 6.51 5.81 5.19 4.64 4.14 CapEx 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 FCF 1.49 2.74 4.37 6.49 5.71 5.01 4.39 3.84 3.34 NPV 1.49 2.74 4.37 6.49 5.71 5.01 4.39 3.84 3.34 IRR 2.81 5.44 9.40 15.32 15.32 15.32 15.32 15.32 15.32
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