BioMed plc, is quoted on the Alternative Investment Market, in London, UK. It is a biomedical company working on a medical product to protect humans against various infectious diseases, including seasonal flu, COVID-19, etc. These can be deployed within hospitals or GP practices and will have unlimited use. It is assumed that the product will be launched in 2024, after investing 20 million in production capacity in the current year (Time 0 - 2022). It is assumed that this investment will have zero residual value by the end of the project.

Before investing in any production capacity, the company has already undertaken Research & Development costing 2.5 million and market research costing 1.0 million. The market research does indicate that there will be a market available for a maximum of 4 years. The limited life span will be due to extreme competition within the product area.

The market research indicates the following, with regard to costs, revenues and sales:

Year	2024	2025	2026	2027
Sales volume (units)	700	560	450	400

As at 2023 the following are forecast:

Selling Price/unit 26,500

Incremental Fixed costs/annum 1,400,000

It is thought that selling price will increase by 3% per annum and that inflation will cause fixed costs to increase at 4% per annum.

The purchasing department is of the opinion that variable costs will depend upon the level of competition between suppliers. This, in turn, will be dependent upon how many competitor manufacturers enter the market. Naturally, if there is strong competition between suppliers, the unit cost will be lower to BioMed plc. The purchasing department predicts the following as at 2023:

Competition between suppliers	Strong	Moderate	Weak
Probability	45%	35%	20%
Variable cost/unit ()	11.00	12.00	13.00

The variable cost forecasts are before taking account of variable cost inflation of 4%, over the life of the product.

It is planned to finance this particular project with a corporate bond issue, at 8% interest, redeemable in ten years time. BioMed has a cost of equity of 12%, a nominal (money) weighted average cost of capital of 10% and a real weighted average cost of capital of 6%.

As BioMed plc is an innovative biomedical company it is thought that this project will carry a similar risk profile to current activity.

Within the general industry, within which BioMed plc operates, the expected target Return on Capital Employed is 20%.

At a Board meeting to discuss the proposals the following conversations were heard:

Neil Lancastle, the Finance Director, said, I think that we should calculate the Net Present Value (NPV)of the project, in order to ascertain if it is worthwhile.

Katarzyna Jaskowiec, the HR Director, responded to this as follows, I have never understood NPV, cant we use an appraisal method which measures percentage return. I always think it is more straightforward basing financial decisions on percentages.

Working as consultant to BioMed plc, you are required to respond to the following tasks.

Required:

Calculate the Expected Net Present Value (ENPV) arising out of the incremental cash flows for the investment. You should also comment on the potential impact of any risk factors attached to variable costs. In addition, related to your calculations, provide a view on the financial acceptability of the project.

In order to satisfy Katarzyna Jaskowiec, calculate the Average Accounting Rate of Return for the investment and briefly comment on your findings. In addition, provide a summary comment with regard to project acceptability, taking account of your calculations in part (a) above.

Provide a brief report to Neil Lancastle and Katarzyna Jaskowiec indicating, with a fulsome rationale, which appraisal method is generally regarded as being the most acceptable. i.e. Net Present Value or Accounting Rate of Return?

Ensure answers are properly cited and referenced where necessary