Pfizer Inc. is considering a new research and development project that requires an initial investment of $25,000,000.
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Question:
Pfizer Inc. is considering a new research and development project that requires an initial investment of $25,000,000. The project is expected to generate the following annual cash inflows:
| Year | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
|---|---|---|---|---|---|---|---|---|---|---|
| Cash Inflows ($) | 3,500,000 | 3,600,000 | 3,700,000 | 3,800,000 | 3,900,000 | 4,000,000 | 4,100,000 | 4,200,000 | 4,300,000 | 4,400,000 |
The discount rate for the project is 10%. The project has a residual value of $500,000 at the end of its 10-year life. The corporate tax rate is 21%.
Required:
- Calculate the net present value (NPV) of the project.
- Compute the internal rate of return (IRR).
- Determine the profitability index (PI).
- Assess the payback period of the project.
- Evaluate the sensitivity of NPV to changes in annual cash inflows.
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