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Modern Pharma is considering the manufacture of a new drug, Floxin, for which the following information has been gathered: | Floxin is expected to have a product life cycle of seven years and after that it would be withdrawn from the market. The sales from this drug are expected to be as follows: Year 1 2 3 4 5 6 7 Sales (in million) 80 120 160 200 160 120 80 | The capital equipment required for manufacturing Floxin is 120 million and it will be depreciated at the rate of 25 percent per year as per the WDV method for tax purposes. The expected net salvage value after seven years is 25 million. | The working capital requirement for the project is expected to be 25 percent of sales. Working capital level is adjusted at the beginning of the year in relation to the expected sales for the year. At the end of 7 years, working capital is expected to be liquidated at par, barring an estimated loss of 34 million on account of bad debts which, of course, will be a tax-deductible expense. The accountant of the firm has provided the following estimates for the cost of Floxin: Raw material cost : 30 percent of sales Variable manufacturing cost: 10 percent of sales Fixed annual operating and maintenance costs : 10 million Variable selling expenses : 10 percent of sales Overhead allocation : 10 percent of sales (excluding depreciation, maintenance, and interest) The incremental overheads attributable to the new product are, however, expected to be only 5 percent of sales. | The manufacture of Floxin will cut into the sales of an existing product thereby reducing its contribution margin by 310 million per year. | The tax rate for the firm is 30 percent. (a) Estimate the post-tax incremental cash flows for the project to manufacture Floxin. Modern Pharma is considering the manufacture of a new drug, Floxin, for which the following information has been gathered: | Floxin is expected to have a product life cycle of seven years and after that it would be withdrawn from the market. The sales from this drug are expected to be as follows: Year 1 2 3 4 5 6 7 Sales (in million) 80 120 160 200 160 120 80 | The capital equipment required for manufacturing Floxin is 120 million and it will be depreciated at the rate of 25 percent per year as per the WDV method for tax purposes. The expected net salvage value after seven years is 25 million. | The working capital requirement for the project is expected to be 25 percent of sales. Working capital level is adjusted at the beginning of the year in relation to the expected sales for the year. At the end of 7 years, working capital is expected to be liquidated at par, barring an estimated loss of 34 million on account of bad debts which, of course, will be a tax-deductible expense. The accountant of the firm has provided the following estimates for the cost of Floxin: Raw material cost : 30 percent of sales Variable manufacturing cost: 10 percent of sales Fixed annual operating and maintenance costs : 10 million Variable selling expenses : 10 percent of sales Overhead allocation : 10 percent of sales (excluding depreciation, maintenance, and interest) The incremental overheads attributable to the new product are, however, expected to be only 5 percent of sales. | The manufacture of Floxin will cut into the sales of an existing product thereby reducing its contribution margin by 310 million per year. | The tax rate for the firm is 30 percent. (a) Estimate the post-tax incremental cash flows for the project to manufacture Floxin
