AHPS Pharmaceuticals' marketing team has conducted a $275,000 feasibility study to assess the viability of introducing a new painkiller called "No Pain Just Good Dreams." The project is expected to have a duration of ten years. According to the marketing department's projections, sales of the new medication are expected to reach 1,000,000 pills in the first year, 1,300,000 pills in the second year, 1,500,000 pills in the third year, and 1,150,000 pills in years 4 to 10. It is important to note that the initial selling price for the painkiller is $20 per pill, with an initial manufacturing cost of $13 per pill. Both the selling price and manufacturing cost are forecasted to increase by 6% annually, following the typical trend in the painkiller market. Selling, general, and administrative expenses are projected to rise by 3% each year due to inflation, starting at $4.5 million in year 1.

The marketing team estimates that the sale of “No Pain Just Good Dreams” would increase the sale of an existing sleeping drug “Sweet Dreams” by 300,000 pills per year over the 10-year life of the project. For the existing sleeping drug, "Sweet Dreams," the average price is projected to be $9 per pill, with a manufacturing cost of $3 per pill, and both the price and manufacturing cost will follow the same trend as the new painkiller. Research and development (R&D) expenses amount to $9 million upfront. Receivables are equal to 12% of sales, payables are equal to 10% of the Cost of Goods Sold (COGS), the inventory is equal to 10% of sales from year 1 to year 9. The project’s net working capital is expected to be recovered in year 10. The acquisition of new equipment incurs a capital expenditure of $5 million.

The company will amortize a portion of this cost annually as depreciation, at a Capital Cost Allowance (CCA) rate of 35%. It is expected that the equipment could be sold for $5 million at the end of year 10. Also, the company plans to place the new equipment in a lab that, in the absence of the project, could be rented out for $150,000 per year starting from year 1. All classes of assets continue to exist after 10 years. The corporate tax rate is set at 35%.

(5 marks) Calculate and report the FCFs from Year 0 to Year 4.

(9 marks) Calculate the NPV of the new painkiller project assuming the weighted average cost of capital is 14%. (Hint: you should use the PVCCATS Formula)

(4 marks) What is the IRR?

(2 marks) Determine the break-even point for the new drug's initial manufacturing cost per unit (keeping the same assumptions as before).