Exor Zeneca Ltd (EZL) is a global, science-led biopharmaceutical business, manufacturing innovative medicines. With the onset of the COVID-19 pandemic, the company has enhanced research and development pioneering new approaches for medication to control the disease. The company is undertaking a new project to expand and accelerate drug discovery. They wish to invest in a new Induction Sealer Machine (ISM-1), that uses aluminium foil seals to close off medication bottle openings.

The Financial Director of the company wishes to purchase the machine as soon possible, in an effort to join the fight against the pandemic and also anticipates using an overdraft facility. You are the financial accountant tasked with appraising the investment decision as to whether or not to purchase ISM-1.The following details are available relative to ISM-1: 1. The initial costs of ISM-1 will be the purchase price of EZ Ltd $50000, ISM-1 will incur import costs from the USA of $12000 and an additional R30 000 to install ISM-1. All costs associated with the purchase and installation of ISM-1 will be incurred and paid for at the commencement of the project, which is 1 January 2021. 2. On the 01 January 2021, ISM-1 will become fully operational and is expected to maintain an economic useful life of four years. ISM-1 will be depreciated on the straight line basis over its economic useful life to its residual value. The residual value of ISM-1 is expected to be 10% of the value of the initial cost of ISM-1. The residual value forms part of the closing cashflow of EZL. 3.The inception working capital requirements for the project will be 2% of the initial cost of ISM-1. 4.EZL anticipates to recover 50% of its investment in working capital at the end of the project. 5.EZL expects the revenue generated in the first year of operating ISM-1 to be R600000, with a growth rate of 2% for the next two years, then a rate of 1% thereafter. The variable costs are expected to be 25% of revenue and is expected to remain constant for the length of the ISM-1 project. 6.In respective of the ISM-1 project, EZL will incur the cost of a qualified Pharmaceutical manufacturing technician from the first year. The company will recruit the technician responsible to perform sterilization and maintenance checks at a cost of R15000 per month. The technician's annual increase will be 5% of the annual cost per annum for the time-span of the project. 7.Administration expenses are incurred in normal operations of EZL, for the duration of the project these are expected to increase by R3 000 per month on account of ISM-1 project. 8.The ISM-1 machine will incur maintenance costs of R2500 per month commencing from year two of the project only. This cost will increase by 10% annually. 9.The Chief Executive Officer (CEO) of EZL has conveyed that the manufacturing plant to accommodate ISM-1, could alternatively be leased out to a competitor Phiser Ltd at a cost of R12 000 per month. 10.An analysis of other costs for EZL, indicates that fixed costs will maintain a reduction of cash fixed costs of R15000 per annum for the duration of the project.

ADDITIONAL INFORMATION Ignore any taxationRound off answers to two decimal placesThe exchange rate is R10: $1All operating cash flows are assumed to occur at the end of the year, unless otherwise stated.EZ Ltd bases its investment decisions on a weighted average cost of capital of 8%Discount factors at selected discount rate are as follows:4%6%8%10%Year 10,9620,9430,9260,909Year 20,9250,890,8570,826Year 30,8890,840,7940,751Year 40,8550,7920,7350,683Year 50,8220,7470,6810,621

You are required to:

1. Calculate the Net Present Value (NPV) of the project and state whether you would accept the project?

2. Critically analyze your calculations in required 1 above and comment on the use of the Net Present Value method for valuation purposes