Following the outbreak oftheNovel Coronavirus(COVID19),CPC apharmaceutical company is considering introducing a new vaccineuntothemarket to help fight the virus.Thiswill require the injection of huge capital to the tune of GH40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH 5,500,000 to setuptheproductionfacility and install that equipment for production. Mr. Smart, the CEO of CPC believes that thevaccinecouldbe manufactured in a building owned by the firm and located in East Legon.Thisvacant building and the land can be sold for GH 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capital investment) by issuing 2000,000 new common stocks at GH 20 per share from its existing shareholders. A total of GH 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bond with a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, theFinanceDirectorhasestimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate onGovernment of Ghanatraded Treasury billsis5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

2020

Variable cost per unit of the product GH150

Selling price per unit GH350

Quantity 400,000units per annum

Again the following information should be taken note of:

Feasibilitystudiescost the company GH2,000,000

Test marketingexpenses amountsto GH1,000,000

The research into the discovery of the vaccine costs GH5,000,000

Variable cost will increase by 5% per annum

Selling price will increase by 10% per annum

Marketing expense will be 5% of sales revenue per year

Overhead cost will be fixed at GH6000,000 per year

The project will last for five (5) years (2021-2025)

Charge depreciation using the straight-line method

Salvage value for equipment is GH2,000,000

CPC falls within the 25% tax bracket

An initialworking capital investment of GH10,000,000 will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital willdeclinetozeroasthe project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project's life

The introduction of thisnewvaccineisexpectedto lead to 10,000 unitsper annum drop in sales of vaccines for other types of corona virus by.Thesellingpriceperunitof existing products is GH100 while the variable cost is GH70.Thishasnotax implications for the new vaccine.

The project will be financed with debt and equity

Required:

a.Evaluate the project using the NPV and Profitability index and recommendwhetherCPC shouldgoahead withthe productionof the vaccine.

b.Discuss three (3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the productionof the vaccine.

c.Under what circumstances will you prefer profitability index to NPV as project evaluation techniques.

Explain why sunkcosts should notbeincludedinacapitalbudgetinganalysis,but opportunitycosts and externalitiesshould be included.