Carefully analysis the question below Question 1 Lufas pharmaceuticals, a leading global pharmaceutical company is consi

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Carefully analysis the question below
Question 1
Lufas pharmaceuticals, a leading global pharmaceutical company
is considering investing in some equipment to produce a localized
vaccine named Covid cure to help combat the Covid-19 pandemic. The
new equipment’s capital cost is estimated at $100 million. If its
purchase is approved now, the equipment can be bought and
production can commence by the end of this year. $50 million has
already been spent on research and development work. Estimates of
revenues and costs arising from the operation of the new equipment
appear as follows:
Year 1 Year
2 Year 3
Year 4 Year 5
Sales price
($/litre)
100
120 120
100 80
Sales volume (million
litres)
0.8
1.0 1.2
1.0 0.8
Variable cost
($/litre)
50
50
40
30
40
Fixed cost
($000)
30
30
30
30
30
If the equipment is bought, sales of some existing Covid-19
products will be lost, resulting in a loss of contribution of $15
million a year, over the life of the equipment. The accountant has
informed you that the fixed cost includes depreciation of $20
million a year on the new equipment. It also includes an allocation
of $10 million for fixed overheads. A separate study has indicated
that if the new equipment were bought, additional overheads,
excluding depreciation, arising from producing the chemical would
be $8 million a year. Production would require additional working
capital of $30 million. For the purposes of your initial
calculations, ignore taxation.
Required:
Write a publishable research paper to
an International Journal using Harvard Referencing style to respond
to the questions below:
(i) Calculate the payback period.
(ii) Calculate the net present value
using a discount rate of 8 per cent.
(Hint: You should deal with the investment in working capital by
treating it as a cash outflow at the start of the project and an
inflow at the end.)
Project
Cash Flows
CovidCure
CovidSolution
CovidMixture
$
$
$
Initial
Outlay
(11)
(8)
(9)
Year 1
4
5
5
Year 2
4
2
3
Year
3
5
3
3
Year
4
6.5
4
5
The company has a cost of capital of
12 per cent and the investment budget for the year that has just
begun is restricted to $12 million. Each vaccine is divisible (that
is, it is possible to undertake part of a vaccine if required).
Which vaccine(s) should the business
invest in and why?