Question 6

A pharmaceutical company is planning a new research project with an initial cost of $300,000. The expected net cash flows are as follows. The company's cost of capital is 11%. Calculate and comment on the project's NPV, IRR, and profitability index.

• Year 1: Cash Flows = $70,000, Discount Factor = 0.901
• Year 2: Cash Flows = $80,000, Discount Factor = 0.812
• Year 3: Cash Flows = $90,000, Discount Factor = 0.731
• Year 4: Cash Flows = $100,000, Discount Factor = 0.659
• Year 5: Cash Flows = $110,000, Discount Factor = 0.593
• Salvage Value: $50,000, Discount Factor = 0.593

Requirements:

1. Calculate the Net Present Value (NPV).
2. Determine the Internal Rate of Return (IRR).
3. Compute the profitability index.
4. Assess the project's viability based on NPV and IRR.