Novo Nordisk A/S is a health care company engaging in the discovery, development, and manufacture of pharmaceutical products. Its specialty is diabetes care and its headquarters are in Bagsvaerd, Denmark. The company sells its products all over the world, including in the United States, Japan, China, Russia, India, and Europe.

As a new member of the capital budgeting division of Novo Nordisk A/S, you have been asked to determine the net cash flows and NPV of a proposed new diabetes drug. The drug is expected to be on the market for three years only, because Novo expects to launch a new and better version of the drug in the near future. If the project is initiated, it will require an expenditure on research and development of 4% of the total amount that Novo spent on research and development in the last financial year. Also, an investment in a new production facility, which is estimated to cost $24 million, will be necessary.

The product revenues for years 1, 2, and 3 are expected to be 0.8%, 0.6%, and 0.4%, respectively, of the total revenue of Novo for the last financial year. The cost of goods sold is projected to be $8 million in years 1 and 2, but only $5 million in year 3. Finally, the selling, general, and administrative costs are assumed to be $3 million in years 1 and 2, but only $2 million in year 3.

In order to solve the problem, you have to use the Income statement and Balance below.

income statement :

1. Novo has decided that the investment in the production facility should be depreciated with the straight-line method over the life of the project. Determine the amount of depreciation each year.
2. Calculate the corporate tax rate that Novo paid for the last financial year.
3. Use the result of Questions 2 and 3 to calculate the unlevered net income of the project for years 0 to 3.
4. In years 1 to 3, the inventory of the project is 1.5 million, receivables are 15% of the project revenues, and payables are 20% of the projects cost of goods sold. Assume that the project requires no cash. Find the net working capital for the project for each year 1 to 3. Also, find the change in net working capital for each year when assuming the project is terminated in year 3 and that net working capital has to be settled the year after the project endsthat is, find the change in net working capital for years 1 to 4.
5. Calculate the free cash flow for years 0 to 4 using Eq. 7.5. Note that you can use the unlevered net income from Question 4.
6. Find the net present value of the project from the calculated free cash flows when assuming that the cost of capital (CoC) for Novo is 12%. You may use the NPV function in Excel. Include cash flows 1 through 4 in the NPV function and then subtract the initial cost (i.e., add the initial cash flow CF₀, which is a negative number).

   NPV(CoC ; CF₁: CF₄) + CF₀

7. For a presentation of the new project to your colleagues in Novos capital budgeting division, make a plot of the NPV as a function of the cost of capital. First, calculate the NPV of the project for a range of different assumptions of cost of capital (e.g., 5%, 10%, 15%, . . ., 40%). Then, plot the calculated NPVs as a function of the corresponding cost of capital. From the figure, note the internal rate of return of the project. Verify your result using Excels IRR function.

Balance Sheet Period Ending 12/31/2018 Current Assets Cash And Cash Equivalents 15,638,000 Short Term Investments Net Receivables 26,889,000 Inventory 16,336,000 Other Current Assets 204,000 Total Current Assets 59,067,000 Long Term Investments 1,773,000 Property, plant and equipment 41,891,000 Goodwill Intangible Assets 5,145,000 Accumulated Amortization Other Assets 2,893,000 Deferred Long Term Asset Charges 2,893,000 Total Assets 110,769,000 Current Liabilities Accounts Payable 6,906,000 Short/Current Long Term Debt Other Current Liabilities 10,810,000 Total Current Liabilities 54,164,000 Long Term Debt Other Liabilities 4,766,000 Deferred Long Term Liability Charges Minority Interest Negative Goodwill Total Liabilities 58,930,000 Stockholders' Equity Misc. Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock 490,000 Retained Earnings 53,406,000 Treasury Stock -2,057,000 Capital Surplus Other Stockholder Equity -2,046,000 Total stockholders' equity 51,839,000 Net Tangible Assets 46,694,000 Income Statement Breakdown 12/30/2018 Total Revenue 111,831,000 Cost of Revenue 17,617,000 Gross Profit 94,214,000 Operating Expenses Research Development 14,805,000 Selling General and Administrative 33,313,000 Total Operating Expenses 46,966,000 Operating Income or Loss 47,248,000 Interest Expense 85,000 Total Other Income/Expenses Net 473,000 Income Before Tax 47,615,000 Income Tax Expense 8,987,000 Income from Continuing Operations 38,628,000 Net Income 38,628,000 Net Income available to common shareholders 38,628,000 Reported EPS Basic 15.96 Diluted 15.93 Weighted average shares outstanding Basic 2,419,603 Diluted 2,424,417 EBITDA 51,625,000 Balance Sheet Period Ending 12/31/2018 Current Assets Cash And Cash Equivalents 15,638,000 Short Term Investments Net Receivables 26,889,000 Inventory 16,336,000 Other Current Assets 204,000 Total Current Assets 59,067,000 Long Term Investments 1,773,000 Property, plant and equipment 41,891,000 Goodwill Intangible Assets 5,145,000 Accumulated Amortization Other Assets 2,893,000 Deferred Long Term Asset Charges 2,893,000 Total Assets 110,769,000 Current Liabilities Accounts Payable 6,906,000 Short/Current Long Term Debt Other Current Liabilities 10,810,000 Total Current Liabilities 54,164,000 Long Term Debt Other Liabilities 4,766,000 Deferred Long Term Liability Charges Minority Interest Negative Goodwill Total Liabilities 58,930,000 Stockholders' Equity Misc. Stocks Options Warrants Redeemable Preferred Stock Preferred Stock Common Stock 490,000 Retained Earnings 53,406,000 Treasury Stock -2,057,000 Capital Surplus Other Stockholder Equity -2,046,000 Total stockholders' equity 51,839,000 Net Tangible Assets 46,694,000 Income Statement Breakdown 12/30/2018 Total Revenue 111,831,000 Cost of Revenue 17,617,000 Gross Profit 94,214,000 Operating Expenses Research Development 14,805,000 Selling General and Administrative 33,313,000 Total Operating Expenses 46,966,000 Operating Income or Loss 47,248,000 Interest Expense 85,000 Total Other Income/Expenses Net 473,000 Income Before Tax 47,615,000 Income Tax Expense 8,987,000 Income from Continuing Operations 38,628,000 Net Income 38,628,000 Net Income available to common shareholders 38,628,000 Reported EPS Basic 15.96 Diluted 15.93 Weighted average shares outstanding Basic 2,419,603 Diluted 2,424,417 EBITDA 51,625,000