CHEMIONE Inc. has a long reputation for manufacturing reliable drugs. The company has been spending on research and development (R&D) for a next-generation diabetes drug since July 2018. Although the firm has spent $1.60 million for R&D during the last 2 years, it is now predicted that achieving a target result in this research may take another 4 to 5 years time. In the meantime, despite the huge controversy, the company is planning to introduce the revolutionary pre-version of this drug, called D-SAFE (commercial name), which might cause long-term health hazards for some patients due to yet to be known reasons. Before introducing this product in the market, the Chief Financial Officer (CFO) of CHEMIONE Inc. is asking for a detailed analysis of the D-SAFE project.

The production line for D-SAFE can be started after renovating one existing section of the factory. The project is expected to run for five years when the targeted final version of D-SAFE will be ready to introduce. Required renovation can be conducted immediately at a cost of $157,000 that includes installation cost of new plant and equipment (P&E). The company has decided to capitalise total renovation costs to new P&E. The pre-launching expenses required for the project will be a one-off payment at the beginning and estimated to be $370,000. The project requires continuing quality assurance inspection that will cost $5,000 per month.

A local distributor of a Swedish company can immediately supply all required parts and accessories of the new P&E for a total charge of $5,100,000 including import duty of $250,000. In addition, for new P&E, transportation cost is estimated to be $43,000. These P&E would bedepreciated using a tax allowable straight-line rate of 15% on prime cost. The company can sell P&E at the termination of the project for $520,000.

It is projected that the annual sales of D-SAFE would be 48,000 cartons, which will require CHEMIONE to operate at 80% of its capacity when the variable operating cost will be 45% of sales. The selling price per carton will be $120. Annual fixed operating costs, excluding depreciation, will be $940,000. It is estimated that the production line will be required to operate at full capacity after the first three years due to increasing demand. Variable operating cost at full capacity would be 40% of sales.

The existing section of the factory, where the new P&E will be installed, is in use by a subcontractor who pays a monthly rent of $8,000. This rent income for CHEMIONE will discontinue once the new production line D-SAFE will commence its operation. It is also estimated that the new production line will require an initial increased investment of $108,000 in stock (inventory) and $46,000 in debtors (accounts receivables) that are offset by an increase in creditors (accounts payable) of $54,000. There will be no further investment in net working capital (NWC) until its final recovery at the end of project life.

The company uses the required rate of return considering its weighted average cost of capital (WACC) that varies from 15 to 19 percent in recent times. The analyst is confused about the rate to be effective for the project; however, she has decided to use a 15 percent required rate to evaluate this project. The corporate tax rate is 30%. The required discounted payback period is 4 years.

Considering the probable consequences of introducing pre-version of the drug, company managers have identified another D-CONT project that would be based on a safe but relatively less effective traditional treatment plan. The initial investment for this D-CONT project would be the same as the D-SAFE project and projected future net cash flows would be as follows:

Year-1: $2,375,000; Year-2: $2,084,000; Year-3: $1,840,000; Year-4: $1,520,000; Year-5: $1,349,000; Year-6: $1,130,000.

Before taking the final decision in the upcoming meeting, the CFO of CHEMIONE Inc. requires a clear explanation of all relevant issues relating to the D-SAFE project. Particularly a FORMAL REPORT is enquired by the CFO to include a detailed analysis of cash flows and explanations of results of capital budgeting methods that are commonly used in evaluating projects. If the project is initiated, the CFO would also be interested to check whether the project would be feasible to contribute $24,000 annual expenditure for ongoing R&D activities of the firm. Furthermore, in a separate section within the report, the CFO is interested to review a detailed comparison between D-SAFE and D-CONT projects with respect to the results of capital budgeting methods using both 15 and 19 percent required rates, crossover rate, and all relevant factors that can assist in making the final decision.

Using Excel Spreadsheet, prepare a full analysis to be presented to the CFO of CHEMIONE Inc. Your analysis should include the following Table of cash flows (Show all digits, do not convert amounts to $ in million or thousand)