Question
Can you answer the question without copying from the other answer. Thanks. That's all the information i have Hilary Maskona, the CEO of AllVax, met
Can you answer the question without copying from the other answer. Thanks. That's all the information i have
Hilary Maskona, the CEO of AllVax, met with her advisor, Vincent Purell, to review a capital-expenditure proposal on a production plant to produce COVID-19 vaccines using mRNA technology. The proposal, named AntiCov Flow project, calls for an expenditure of $9 million spread over three years to convert an existing production plant from batch to continuous-flow technology and to install sophisticated state-of-the-art process controls throughout the plant. This project is only feasible with a continuous source of cationic lipids from a chemical synthesis process conducted in a specialised manufacturing facility. The proposal suggests AllVax to purchase this type of manufacturing facility from a supplier (rather than sourcing the cationic lipids from two separate suppliers). AllVax has an option to exclusively purchase the cationic lipids facility from a supplier for $4 million (included in the proposed $9 million expenditure). The option was purchased several years earlier. Vincent advises the CEO that a comparable cationic lipids manufacturing facility can be sold today for $7 million in an auction. Vincent also forecasts that at the end of the project, the value of the cationic lipids manufacturing facility will be $30 million. This option will expire in 5 months.
The proposal will require the plant to be shut down for 5 months in the 1st year, 4 months in the 2nd year, and 3 months in the 3rd year. Vincent believes the loss will not be permanent. The benefits include an increase of 6% in new output gain on old output [new output = old output x (1+6%)] and an increase of 3% in gross margin on old gross margin of 11.5% (new gross margin = old gross margin + gross margin increase). The increased outputs will necessitate additional work-in-process inventory in value to 3% of the increased cost of goods. Vincent suggests that new assets will be fully depreciated on a straightline basis over the life of the project. It is AllVaxs policy to record depreciation expenses in the same year as expenditures. Vincent also estimates that overhead costs are at 3.5% of the increased sales. Inflation is set at 0%.
It is AllVaxs policy to evaluate projects based on four criteria: (1) net present value, (2) internal rate of return, (3) payback, and (4) growth in earnings per share. Your task is to examine Vincents analysis and make adjustments where necessary.
1. Provide a quantitative analysis of the AntiCov Flow project by completing the AntiCov Flow spreadsheet provided.
2. Provide your estimates of each of the following project selection methods: (1) Net Present Value (NPV), (2) Internal Rate of Return (IRR), (3) payback, and (4) growth in earnings per share (EPS). Pick two methods that you think most appropriate to evaluate the project? Justify your choices. See References for a summary of the first three methods. The growth in EPS in method (4) is based on the average annual EPS contribution of a project over its entire economic life, using the number of outstanding shares at the most recent fiscal year-end (FYE) as the basis for the calculation. The project is deemed feasible if the contribution to the net income from the contemplated project is positive.
3. An executive vice president of AllVax recently proposed that the company should consider a project in Alt Zeneca (based on the Alt Zeneca spreadsheet provided). There is no need to adjust this worksheet. AllVax only has resources to invest in either the AntiCov Flow project or the Alt Zeneca project. Hilary has asked you to evaluate the Alt Zeneca project as she does not trust Vincent. You need to evaluate the Alt Zeneca project based on four criteria: (1) net present value, (2) internal rate of return, (3) payback, and (4) growth in earnings per share. Provide your estimates of each of these project selection methods.
4. What should you do when NPV and another valuation method (out of those presented in question 2) disagree in ranking mutually exclusive projects? Did this occur for our comparison between the AntiCov Flow and Alt Zeneca projects? You then need to advise Hilary on which project to invest and provide reasons for your decision.
Assumptions Annual Output (metric tons) New Output Gain on Old Output Maximum Possible Output Price ton (dollars) Inflation (prices and costs) mass margin increase 260,000 60% 286,000 541 0.0% 3.00% Discount rate Overhead/Sales Salvage Value WIP Inventory/Cost of Goods Sold Terminal Value of Specialised Manufacturing Facility Montbs Downtime, Construction 100% | 3.5%.|| 0 3.0% 30 S 4 3 old Cross Margin Tax Rate Number of shares outstanding Investment Oatlay (millions) 11.5% 30.0% 200,000,000 4 2021 2022 2023 Now 2021 2022 2023 3 1 1 0 Nowe 2021 1 2021 2 2022 3 2021 4. 2024 2023 5 2025 6 2026 7 2022 8 2028 2028 10 2010 11 2031 12 2032 13 2011 14 2014 2029 15 2035 Year 1. Estimate of Incremental Gross Profit New Output Lost Output-Construction New Sales (Millions) New Gross Margin Now Gross Profit 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) 260,000 140.66 16.18 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.60 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) Old Output Old Sales Old Gross Profit Incremental Gross Profit 2. Estimate of Incremental Depreciation Yr. O Outlays Yr. 1 Outlays Yr. 2 Outlays 260.000 140.66 16.18 (16.18) (16.18) Yr. 3 Outlays Total, New Depreciation 3. Overhead 4. Pretax Incremental Profit 5. Tax Expense 6. After-tax Profit 7. Cash Flow Adjustments Add back Depreciation Less additional WIP invcotery WIP Inventory Recovery Capital Spending Terminal Value. Facility 8. Free Cash Flow 0 6 9 1 2021 2 2022 3 2023 4 2024 5 2025 8 2028 10 2030 11 2031 12 2032 13 2033 14 2034 15 2035 Year Now 2026 2027 2029 After-tax Profit 0.39 2.30 2.40 2.20 2.33 2.20 2.23 2.26 2.29 2.30 1.42 1.42 1.42 1.51 1.51 Free Cash Flow -9 1.95 2.86 1.30 3.38 5.33 2.62 2.62 2.61 2.60 2.60 1.82 1.85 1.85 1.81 1.99 Assumptions Annual Output (metric tons) New Output Gain on Old Output Maximum Possible Output Price ton (dollars) Inflation (prices and costs) mass margin increase 260,000 60% 286,000 541 0.0% 3.00% Discount rate Overhead/Sales Salvage Value WIP Inventory/Cost of Goods Sold Terminal Value of Specialised Manufacturing Facility Montbs Downtime, Construction 100% | 3.5%.|| 0 3.0% 30 S 4 3 old Cross Margin Tax Rate Number of shares outstanding Investment Oatlay (millions) 11.5% 30.0% 200,000,000 4 2021 2022 2023 Now 2021 2022 2023 3 1 1 0 Nowe 2021 1 2021 2 2022 3 2021 4. 2024 2023 5 2025 6 2026 7 2022 8 2028 2028 10 2010 11 2031 12 2032 13 2011 14 2014 2029 15 2035 Year 1. Estimate of Incremental Gross Profit New Output Lost Output-Construction New Sales (Millions) New Gross Margin Now Gross Profit 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) 260,000 140.66 16.18 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.60 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) Old Output Old Sales Old Gross Profit Incremental Gross Profit 2. Estimate of Incremental Depreciation Yr. O Outlays Yr. 1 Outlays Yr. 2 Outlays 260.000 140.66 16.18 (16.18) (16.18) Yr. 3 Outlays Total, New Depreciation 3. Overhead 4. Pretax Incremental Profit 5. Tax Expense 6. After-tax Profit 7. Cash Flow Adjustments Add back Depreciation Less additional WIP invcotery WIP Inventory Recovery Capital Spending Terminal Value. Facility 8. Free Cash Flow 0 6 9 1 2021 2 2022 3 2023 4 2024 5 2025 8 2028 10 2030 11 2031 12 2032 13 2033 14 2034 15 2035 Year Now 2026 2027 2029 After-tax Profit 0.39 2.30 2.40 2.20 2.33 2.20 2.23 2.26 2.29 2.30 1.42 1.42 1.42 1.51 1.51 Free Cash Flow -9 1.95 2.86 1.30 3.38 5.33 2.62 2.62 2.61 2.60 2.60 1.82 1.85 1.85 1.81 1.99Step by Step Solution
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