Question 1 (30 marks) Suppose Pfizer and BioNTech have the following two mutually exclusive development plan for new lab

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Question 1 30 Marks Suppose Pfizer And Biontech Have The Following Two Mutually Exclusive Development Plan For New Lab 1 (157.12 KiB) Viewed 22 times

Question 1 (30 marks) Suppose Pfizer and BioNTech have the following two mutually exclusive development plan for new laboratories and research centers, Project A and Project B. The financial teams have prepared estimates of the initial investment, evaluation of the two possibilities produces the following cash flows and internal rates of return (IRR), they are shown in the table below. The financial managers believe that the two plans carry similar risks and the acceptance of either of them will not change the group's overall risk. With the tight timeline, the group only accepts projects that can be paid back up to 2.5 years. Suppose the companies requires a return of 12% on the development plans. Year Project A (US$ in thousand) (75,000) 32,400 0 1 Project B (US$ in thousand) (38,000) 17,800 14,200 19,800 16.92% 2 3 30,200 36,600 15.06% IRR (1) Which project will you recommend by applying the internal rates of return (IRR) criterion? Why? (2 marks) (ii) Apply the Net Present Value (NPV) method to determine which project should be adopted. Explain. (5 marks) (ii) Apply the payback criterion to determine which project should be adopted? Explain. (3 marks) (iv) Apply the Profitability Index (PI) criterion to determine which project should be adopted. Explain. (3 marks) (v) Based on your answers in parts (i) through (iv), which project will you finally recommend? Explain. (7 marks) (vi) Suppose Pfizer has several positive net present value projects that would like to pursue and thus decided to issue additional shares of common stock. As a result of this stock issue, the firm's stock price declined. Explain why this occurred when the proceeds of the issue are being used to fund positive net present value projects. (10 marks)