Maxine Wells, the CEO of Jabnet, met with her advisor, Dennis Clean, to review a capital-expenditure proposal on a production plant to produce SARS-20 vaccines using mRNA technology. The proposal, named AntiSARS project, calls for an expenditure of $9 million spread over three years to convert an existing production plant from batch to continuous-flow technology and to install sophisticated state-of-the-art process controls throughout the plant. This project is only feasible with a continuous source of cationic lipids from a chemical synthesis process conducted in a specialised manufacturing facility. The proposal suggests Jabnet to purchase this type of manufacturing facility from a supplier. Jabnet has an option to exclusively purchase the cationic lipids facility from a supplier for $4 million (included in the proposed $9 million expenditure). The option was purchased several years earlier. Dennis advises the CEO that a comparable cationic lipids manufacturing facility can be sold today for $7 million in an auction. Dennis also forecasts that at the end of the project, the value of the cationic lipids manufacturing facility will be $30 million. This option will expire in 5 months.

The proposal will require the plant to be shut down for 5 months in the 1st year, 4 months in the 2nd year, and 3 months in the 3rd year. Dennis believes the loss will not be permanent. The benefits include an increase of 6% in new output gain on old output [new output = old output x (1+6%)] and an increase of 3% in gross margin on old gross margin of 11.5% (new gross margin = old gross margin + gross margin increase). The increased outputs will necessitate additional work-in-process inventory in value to 3% of the increased cost of goods. Dennis suggests that new assets will be fully depreciated on a straightline basis over the life of the project. It is Jabnet's policy to record depreciation expenses in the same year as expenditures. Dennis also estimates that overhead costs are at 3.5% of the increased sales. Inflation is set at 0%.

It is Jabnet's policy to evaluate projects based on four criteria: (1) net present value, (2) internal rate of return, (3) payback, and (4) growth in earnings per share. Your task is to examine Dennis's analysis and make adjustments where necessary.

1. Provide a quantitative analysis regarding the AntiSARS project: complete spreadsheet provided. (Please focus on years 2025-2035)

2)Provide your estimates of each of the following project selection methods: (1) Net Present Value (NPV), (2) Internal Rate of Return (IRR), (3) payback, and (4) growth in earnings per share (EPS). Pick two methods that you think most appropriate to evaluate the project? Justify your choices. The growth in EPS in method (4) is based on the average annual EPS contribution of a project over its entire economic life, using the number of outstanding shares at the most recent fiscal year-end (FYE) as the basis for the calculation. The project is deemed feasible if the contribution to the net income from the contemplated project is positive.

(Financial values in millions of Australian Dollars) ANTISARS Analysis Assumptions Annval Output (metric tons) New Output Gain on Old Output Maximum Possible Output Price/ton (dollars) Inflation (prices and costs) Gross margin increase 260,000 6.0% 286,000 541 0.0% 3.00% Discount rate Overhead Sales Salvage Value WIP Inventory/Cost of Goods Sold Terminal Valve of Specialised Manufacturing Facility Months Downtime, Construction 10.0% 3.5% 0 3.0%) 301 5 4 3 11.5% Old Gross Margin Tax Rate Number of shares outstanding Investment Outlay (millions 2021 2022 2023 Now 2021 2022 2023 30.0% 200,000,000 4 3 1 1 1 2021 2 2022 2028 3 2023 4 2024 5 2025 6 2026 7 2027 8 2028 9 2029 10 2030 11 2031 12 2032 13 2033 14 2034 15 2035 0 Year Now 1. Estimate of Incremental Gross Profit New Output Lost Output--Construction New Sales (Millions) New Gross Margin New Gross Profit 260,000 260,000 140.66 140.66 16.18 16.18 (16.18) (16.18) 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 140.66 140.66 140.66 140.66 140.66 140.66 140.66 140.66 140.66 140.66 16.18 16.18 16.18 16.18 16.18 16.18 16.18 16.18 16.18 16.18 (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) Old Output Old Sales Old Gross Profit Incremental Gross Profit 2. Estimate of Incremental Depreciation Yr. O Outlays Yr. 1 Outlays Yr. 2 Outlays Yr. 3 Outlays Total, New Depreciation 3. Overhead 4. Pretax Incremental Profit 5. Tax Expense 6. After-tax Profit 7. Cash Flow Adjustments Add back Depreciation Less additional WIP inventory WIP Inventory Recovery Capital Spending Terminal Valve, Facility 8. Free Cash Flow (Financial values in millions of Australian Dollars) ANTISARS Analysis Assumptions Annval Output (metric tons) New Output Gain on Old Output Maximum Possible Output Price/ton (dollars) Inflation (prices and costs) Gross margin increase 260,000 6.0% 286,000 541 0.0% 3.00% Discount rate Overhead Sales Salvage Value WIP Inventory/Cost of Goods Sold Terminal Valve of Specialised Manufacturing Facility Months Downtime, Construction 10.0% 3.5% 0 3.0%) 301 5 4 3 11.5% Old Gross Margin Tax Rate Number of shares outstanding Investment Outlay (millions 2021 2022 2023 Now 2021 2022 2023 30.0% 200,000,000 4 3 1 1 1 2021 2 2022 2028 3 2023 4 2024 5 2025 6 2026 7 2027 8 2028 9 2029 10 2030 11 2031 12 2032 13 2033 14 2034 15 2035 0 Year Now 1. Estimate of Incremental Gross Profit New Output Lost Output--Construction New Sales (Millions) New Gross Margin New Gross Profit 260,000 260,000 140.66 140.66 16.18 16.18 (16.18) (16.18) 260,000 140.66 16.18 (16.18) 260.000 140.66 16.18 (16.18) 260,000 140.66 16.18 (16.18) 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 260,000 140.66 140.66 140.66 140.66 140.66 140.66 140.66 140.66 140.66 140.66 16.18 16.18 16.18 16.18 16.18 16.18 16.18 16.18 16.18 16.18 (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) (16.18) Old Output Old Sales Old Gross Profit Incremental Gross Profit 2. Estimate of Incremental Depreciation Yr. O Outlays Yr. 1 Outlays Yr. 2 Outlays Yr. 3 Outlays Total, New Depreciation 3. Overhead 4. Pretax Incremental Profit 5. Tax Expense 6. After-tax Profit 7. Cash Flow Adjustments Add back Depreciation Less additional WIP inventory WIP Inventory Recovery Capital Spending Terminal Valve, Facility 8. Free Cash Flow