Hi! I am having trouble with a large HW assignment and would like help. I was wondering if you can help me. Since it is a lot, I am willing to use all my 20 questions in this subscription period to answer this.

Proposal: Your marketing folks want to purchase the rights to a new diet pill, DietDelight. There is a 15 year patent on this product. The cost is $270 million for the rights to sell during the patent life. You will also need to purchase $45 million in production equipment.

Assignment: Develop Valuation model to determine if this proposal makes sense by calculating the IRR and NPV. Give me a short explanation of your results. This will require developing a Profit and Loss Statement, a partial Balance sheet (working capital only) and a cash flow schedule (PAT plus/minus adjustments). Your cost of capital is 15%. Determine IRR and explain if your company should invest in this product or not. What is your conslusion if your cost of Capital were 18%? Explain. Note: Put all figures in millions, with 1 or 2 decimal places showing. Remember: The IRR is what you earn. The cost of capitakl is what you want. If NPV is negative it does not mean you are losing money.

Assumptions

Profit and Loss:Sales is based off your share of the total diet pill market size. Market in 1 year is $1 billion and grows 5% in a year (compounded). Your share of the Market is 10% (Year 1) and grows 1% each year, leveling off at 20% in Yrs 11-15. Cost of goods is 20% of sales. Selling cost is 35% of sales. Depreciation: Straight line the $45 million over 15 years. No residual value. Amortization: Straight line the purchase price over 15 years. Tax rate all years is 40% of profit before taxes.

Balance Sheet (working capital only): Year end receivables equal 10% of that year's sales. Year end payables equal 8% of that year's cost of goods sold and selling expenses. Net Workig capital is the difference between the two. The net change in this balance from one year to the next whatyou include in the cash flow adjustments. An increase in Working Capital is a negative adjustment in the cash flow section.

Cash Flow Section: Start with that year's net income. Add back noncash expense (depreciation and amortization), adjust for change in that year's working capital balance. You MUST set up a YEAR Zero column before year 1. This will include two one time adjustments 1) the purchase price and 2) the euipment purchase. These amounts should be shown as negative. They are an offset to the anual returns in year's 1 through 15.

IRR formula is as follows: =IRR (Year 0 though Yr 15 cash flows, .01) Note: "0.1" or 10% is a guess rate Example: if cash flows are on line 58 and years 0 to 15 are in columns"B" though "Q" =IRR(B58:Q58,0.1)

NPV formula is as follows: =NPV (Yr 1 though Yr 15 cashflows, Cost of Capital %) +year 0 example if cash flows are on line 58 and years 0 to 15 are in columns"B" though "Q" =NPV(0.15,C58:Q58)+B58 NOTE ".15" is your 15% C of C.