Corporate Finance Fundamentals of Capital Budgeting As a new member of the capital budgeting division of Novo Nordisk A S, you have been asked to determine the net cash flows and the NPV of a proposed new diabetes drug The drug is expected to be on the market for three years only, because Novo expects to launch a new and better version of the drug in the near future If the project is initiated, it will require an upfront (that is, year zero) expenditure on the R D of 4 of the total amount that Novo spent on the R D in the last financial year Also an investment in a new production facility, which is estimated to cost $141 35 million, will be necessary The product revenues for years 1, 2, and 3 are expected to be 0 8 , 0 6 , and 0 4 , respectively, of the total revenue of Novo for the last financial year The cost of goods sold (COGS) is projected to be the same percentage of the sales as in the last financial year The overheads (sales, general, and administrative costs) are assumed to be 179 78 million EUR in the first two years and 152 54 million EUR in the last one 1)To obtain the latest financial statements of Novo Nordisk A S, look at the XL file provided 2)Novo has decided that investments in the production facilities should be depreciated with the straightline method over the life of the project Determine the amount of depreciation each year 3)Calculate the corporate tax rate that Novo paid for the last financial year 4)Calculate the unlevered net income for the years 0 to 3 5)In years 1 to 3 the inventory, the receivables, and the payables will be the same proportions of COGS and sales respectively as in the last financial year Assume that the project requires no cash to be held for security reasons Find the net working capital (NWC) for the project for each year 1 to 3 Also find the change in the NWC assuming the project is terminated in year 3 and that net working capital has to be settled in the year after the project ends 6)Calculate the free cash flows (FCF) for years 0 to 4 7)Find the net present value of the project assuming that the cost of capital for Novo is 12 8)Should NOVO invest in the new diabetes drug What is the IRR of the project

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Corporate Finance : Fundamentals of Capital Budgeting As a new member of the capital budgeting division of Novo Nordisk A/S, you have been asked to

Corporate Finance : Fundamentals of Capital Budgeting

As a new member of the capital budgeting division of Novo Nordisk A/S, you have been asked to determine the net cash flows and the NPV of a proposed new diabetes drug. The drug is expected to be on the market for three years only, because Novo expects to launch a new and better version of the drug in the near future. If the project is initiated, it will require an upfront (that is, year zero) expenditure on the R&D of 4% of the total amount that Novo spent on the R&D in the last financial year. Also an investment in a new production facility, which is estimated to cost $141.35 million, will be necessary.

The product revenues for years 1, 2, and 3 are expected to be 0.8%, 0.6%, and 0.4%, respectively, of the total revenue of Novo for the last financial year. The cost of goods sold (COGS) is projected to be the same percentage of the sales as in the last financial year. The overheads (sales, general, and administrative costs) are assumed to be 179.78 million EUR in the first two years and 152.54 million EUR in the last one.

1)To obtain the latest financial statements of Novo Nordisk A/S, look at the XL file provided.
2)Novo has decided that investments in the production facilities should be depreciated with the straightline method over the life of the project. Determine the amount of depreciation each year.
3)Calculate the corporate tax rate that Novo paid for the last financial year.
4)Calculate the unlevered net income for the years 0 to 3.
5)In years 1 to 3 the inventory, the receivables, and the payables will be the same proportions of COGS and sales respectively as in the last financial year. Assume that the project requires no cash to be held for security reasons. Find the net working capital (NWC) for the project for each year 1 to 3. Also find the change in the NWC assuming the project is terminated in year 3 and that net working capital has to be settled in the year after the project ends.
6)Calculate the free cash flows (FCF) for years 0 to 4.
7)Find the net present value of the project assuming that the cost of capital for Novo is 12%.
8)Should NOVO invest in the new diabetes drug? What is the IRR of the project?