I have a question about some calculations that I have done for the question below Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5 years, and is expected to have a scrape value of $200,000 at the end of the project Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project Pharmos Incorporated expect the project to have a life of five years The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000 The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five Fixed overhead is $180,000 per year over the life of the project The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after tax in the equipment market The companys financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project The following information about the companys sources of financing is provided below The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi annually and matures in 10 years The bonds were sold at par, and incurred floatation cost of 2 percent per issue The companys preferred stock pays an annual dividend of 4 5 percent and is currently selling for $60, and there are 100,000 shares outstanding There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each The beta on these shares is 0 95 The 20 year Treasury Bond rate is currently 4 5 percent and you have estimated market risk premium to be 6 75 percent using the returns on stocks and Treasury bonds from 2010 to 2019 Pharmos Incorporated has a marginal tax rate of 25 percent Determine the initial outlay of the project Calculate the annual after tax operating cash flow for Years 1 5 Determine the terminal year non operating cash flow in year 5 Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product What is the estimated Internal Rate of Return (IRR) of the project Should the project be accepted based on the IRR Based on the information above, I did some calculations for the questions asked but I am having some issues with the terminal year non operating cash flow in year 5, Net Present Value, and the estimated Internal Rate of Return Are my steps correct so far I've attached an image of what I have done so far a Tierhalf they wet Breves You WAECSS NA ad TEN Here Fhir E Srps Art 2 500,000 30 al II 3 Qutud TVAR ILL Carol OC 3 2 00 20 SKOOL win LWS Tavlor 13517 albl Orfa To 380,000 20 $ 2 1 Obitual enmitgel Sr hr par es 5 JWA multi no com total ter 2951 The 20 00 2x 11 XX arms 3701 71 M 2 TETA Tent Epis TXO 201 1,2014 STOJA 2013 LAVA RE 2 YIRLITRI $ SUL R LOLE LEJO 180,000305 JERICOM 1811700C 180000 JE 183 000 90313 LANDS UU CALLUS ALL $ S DHL Per Te ar Ic, 2016 3 ILUL 3 44342 29 484 203 39 1,20 4179 10 30 1 21 13210 de les 122,230 20 1432 000 13235 330301 2,00 20 5 21219 ms 20$ TH 1 lasalli 20,000 cos 5212001 3500LC DENTIMIT Temas 11 3 DU SILUEWE 20 OCO CIRE PROBLEMETRYCrista TI c Urth the workalar werth att 3 1 ter DELFI Sazi www Lavaly 3 inn 200,000 mm 22 000 $ 30 000 Bu Eva TERRURIER NEWART , Cath E X bevir) 555 U X 1911 1 Termin Falur Prewrand Advice ir payanthi productie Fri PWM NPC LINIrai T 0 PmVal 1 2 320 000 2 320C 3 200 DE 3,33313 1 1 $2,900 051 350 790 00 1191 MS44138 10 6030 1249 4 224430 I 1994 92,499 SULUD 1 42301 200 Teral 7 292,213 57 NPY Chirch Ourg 1 3 23133 13 Cadou 113 3 TOUTE NEGO 2 t LUIESC SCOTTET NPT 3 X ( DWP 1201005 0 32200005 ( ) 1 13 X 12 Taar I'xtas Mucha Azul I I'xtash NUC Capsi 1 99 Fle Inte 15 NTY Castu ramu 1,21 Cache SELE 1 2 $ $ 1 1 ULUG'L JUILLET $ LIS irTre WITCS 12 TTC STATES SOPCE PULJICEST LUULEE ULTES STERSKI ELTO 1961 U 9 35000 2,210 OSRL 539,672 23 U coms SPV1 injort authent TER 72146 RX Cres Capitaads meer a Tierhalf they wet Breves You WAECSS NA ad TEN Here Fhir E Srps Art 2 500,000 30 al II 3 Qutud TVAR ILL Carol OC 3 2 00 20 SKOOL win LWS Tavlor 13517 albl Orfa To 380,000 20 $ 2 1 Obitual enmitgel Sr hr par es 5 JWA multi no com total ter 2951 The 20 00 2x 11 XX arms 3701 71 M 2 TETA Tent Epis TXO 201 1,2014 STOJA 2013 LAVA RE 2 YIRLITRI $ SUL R LOLE LEJO 180,000305 JERICOM 1811700C 180000 JE 183 000 90313 LANDS UU CALLUS ALL $ S DHL Per Te ar Ic, 2016 3 ILUL 3 44342 29 484 203 39 1,20 4179 10 30 1 21 13210 de les 122,230 20 1432 000 13235 330301 2,00 20 5 21219 ms 20$ TH 1 lasalli 20,000 cos 5212001 3500LC DENTIMIT Temas 11 3 DU SILUEWE 20 OCO CIRE PROBLEMETRYCrista TI c Urth the workalar werth att 3 1 ter DELFI Sazi www Lavaly 3 inn 200,000 mm 22 000 $ 30 000 Bu Eva TERRURIER NEWART , Cath E X bevir) 555 U X 1911 1 Termin Falur Prewrand Advice ir payanthi productie Fri PWM NPC LINIrai T 0 PmVal 1 2 320 000 2 320C 3 200 DE 3,33313 1 1 $2,900 051 350 790 00 1191 MS44138 10 6030 1249 4 224430 I 1994 92,499 SULUD 1 42301 200 Teral 7 292,213 57 NPY Chirch Ourg 1 3 23133 13 Cadou 113 3 TOUTE NEGO 2 t LUIESC SCOTTET NPT 3 X ( DWP 1201005 0 32200005 ( ) 1 13 X 12 Taar I'xtas Mucha Azul I I'xtash NUC Capsi 1 99 Fle Inte 15 NTY Castu ramu 1,21 Cache SELE 1 2 $ $ 1 1 ULUG'L JUILLET $ LIS irTre WITCS 12 TTC STATES SOPCE PULJICEST LUULEE ULTES STERSKI ELTO 1961 U 9 35000 2,210 OSRL 539,672 23 U coms SPV1 injort authent TER 72146 RX Cres Capitaads meer

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 01, 2024

I have a question about some calculations that I have done for the question below. Pharmos Incorporated is a Pharmaceutical Company which is considering investing

I have a question about some calculations that I have done for the question below.

Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000. The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.

The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.

The companys financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the companys sources of financing is provided below:

The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The companys preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.

The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.

Determine the initial outlay of the project.
Calculate the annual after-tax operating cash flow for Years 1 -5.
Determine the terminal year non-operating cash flow in year 5:
Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.
What is the estimated Internal Rate of Return (IRR) of the project?
Should the project be accepted based on the IRR?

Based on the information above, I did some calculations for the questions asked but I am having some issues with the terminal year non-operating cash flow in year 5, Net Present Value, and the estimated Internal Rate of Return.

Are my steps correct so far?

I've attached an image of what I have done so far image text in transcribed

a. Tierhalf they wet Breves You WAECSS NA ad TEN Here Fhir E. Srps. Art 2.500,000 30 . al II 3 Qutud TVAR ILL Carol OC 3./ 2.00 20 SKOOL win LWS Tavlor 13517 albl Orfa To 380,000 20 $ 2 1. Obitual enmitgel Sr hr par : es 5 JWA : multi no com total ter 2951 The 20.00% 2x 11. XX arms 3701 71 M 2 TETA . Tent Epis TXO 201 1,2014 STOJA 2013 LAVA RE 2.YIRLITRI $ SUL R: LOLE LEJO 180,000305 JERICOM 1811700C 180000 JE 183.000 90313 LANDS . UU CALLUS ALL $ S. DHL Per Te ar Ic, 2016 3.ILUL 3 44342 29 484.203 39 1,20 4179 10.30 1.21 13210 de les 122,230 20 1432.000 13235 330301 -2,00 20 5 21219 ms 20$ TH 1..lasalli 20,000 cos 5212001 3500LC DENTIMIT Temas 11.3 : DU SILUEWE 20 OCO CIRE PROBLEMETRYCrista TI c. Urth the workalar werth att 3 1 ter DELFI Sazi www Lavaly 3 inn 200,000 mm 22.000 $ - 30.000 Bu Eva. TERRURIER NEWART , Cath E X bevir) 555 -U: X 1911 1. Termin Falur Prewrand Advice ir payanthi productie Fri PWM NPC LINIrai T. 0- PmVal 1 2.320.000 2 320C 3.200 DE 3,33313 1 1 $2,900 051-350 790.00 1191 MS44138.10 6030 1249 4 224430 I 1994 92,499 SULUD 1 42301:200 Teral 7.292,213.57 NPY Chirch Ourg 1 3.23133:13 Cadou 113. 3. TOUTE NEGO 2 t LUIESC SCOTTET NPT 3 X ( DWP 1201005 0.32200005 (-) 1.13 X 12 Taar I'xtas Mucha Azul I. I'xtash NUC: Capsi 1.99 Fle Inte 15 NTY - Castu ramu 1,21 Cache SELE 1 2 $ $ 1.1. ULUG'L JUILLET $ LIS irTre WITCS 12 TTC STATES SOPCE PULJICEST LUULEE ULTES STERSKI ELTO 1961 . U 9.35000 2,210 OSRL 539,672 23 U. coms SPV1 injort authent TER-72146 RX Cres Capitaads meer a. Tierhalf they wet Breves You WAECSS NA ad TEN Here Fhir E. Srps. Art 2.500,000 30 . al II 3 Qutud TVAR ILL Carol OC 3./ 2.00 20 SKOOL win LWS Tavlor 13517 albl Orfa To 380,000 20 $ 2 1. Obitual enmitgel Sr hr par : es 5 JWA : multi no com total ter 2951 The 20.00% 2x 11. XX arms 3701 71 M 2 TETA . Tent Epis TXO 201 1,2014 STOJA 2013 LAVA RE 2.YIRLITRI $ SUL R: LOLE LEJO 180,000305 JERICOM 1811700C 180000 JE 183.000 90313 LANDS . UU CALLUS ALL $ S. DHL Per Te ar Ic, 2016 3.ILUL 3 44342 29 484.203 39 1,20 4179 10.30 1.21 13210 de les 122,230 20 1432.000 13235 330301 -2,00 20 5 21219 ms 20$ TH 1..lasalli 20,000 cos 5212001 3500LC DENTIMIT Temas 11.3 : DU SILUEWE 20 OCO CIRE PROBLEMETRYCrista TI c. Urth the workalar werth att 3 1 ter DELFI Sazi www Lavaly 3 inn 200,000 mm 22.000 $ - 30.000 Bu Eva. TERRURIER NEWART , Cath E X bevir) 555 -U: X 1911 1. Termin Falur Prewrand Advice ir payanthi productie Fri PWM NPC LINIrai T. 0- PmVal 1 2.320.000 2 320C 3.200 DE 3,33313 1 1 $2,900 051-350 790.00 1191 MS44138.10 6030 1249 4 224430 I 1994 92,499 SULUD 1 42301:200 Teral 7.292,213.57 NPY Chirch Ourg 1 3.23133:13 Cadou 113. 3. TOUTE NEGO 2 t LUIESC SCOTTET NPT 3 X ( DWP 1201005 0.32200005 (-) 1.13 X 12 Taar I'xtas Mucha Azul I. I'xtash NUC: Capsi 1.99 Fle Inte 15 NTY - Castu ramu 1,21 Cache SELE 1 2 $ $ 1.1. ULUG'L JUILLET $ LIS irTre WITCS 12 TTC STATES SOPCE PULJICEST LUULEE ULTES STERSKI ELTO 1961 . U 9.35000 2,210 OSRL 539,672 23 U. coms SPV1 injort authent TER-72146 RX Cres Capitaads meer