Question:Im looking for assistance completing the attached excel spreadsheet (template provided), there is no written analysis needed.

Introduction:

You are the senior financial analyst for Fosbeck Generic Drug Co (Fosbeck). The firm manufactures and sells generic over-the-counter drugs in plants located throughout the country.You have been asked to generate some answers to questions emanating from the Board of Directors. These questions can be grouped into two broad categories - what projects to choose for the near future and how to finance these projects.

Deliverable:

Correctly fill in the attached spreadsheet

Steps to Completion:Individual Project Analysis

Your first task is to analyze the company's three projects and provide your recommendations about their implementation.

Automation project

One of Fosbeck's plants is trying to decide whether to automate its drug manufacturing by purchasing a fully automated bioreactor machine complex.

The proposed machine costs$400 Mand it will have a five year anticipated life and will be depreciated by using the 3-year MACRS depreciation method toward a zero salvage value. (MACRS depreciation rates are: Year 1: 33%, Year 2: 45%, Year 3: 15% and Year 4: 7%) However, the plant will be able to sell the machine in the after-market for25%of its original costs at the end of year 5.The firm estimates that the installation of the bioreactor will bring annual costs savings of$50 Mfrom reduced labor costs,$10 Mper year from reduced waste disposal costs, and$80 Mper year from the sales byproduct of bioreactor process net of selling expenses. Fosbeck requires a12%of return from its investment and has a38%marginal tax rate.

Decision Criteria - NPV and IRR

Calculate the NPV and IRR for the project.

The manager of the plant raised some concerns about the revenues from the byproduct sale. He projects that the price of the byproduct in year 1 could be10%to50%less than what was projected. However, the savings from reduced labor costs and reduced waste disposal costs would remain same. He presented the following probability distribution on the projected reclaimed plastic sales:

Remain same as projected40%

Decrease by10%30%

Decrease by30%20%

Decrease by50%10%

Estimate the NPV and IRR for each of these scenarios. Estimate the expected NPV.

Break-even Analysis

At what volume of byproduct sales would Fosbeck have a break-even NPV=0?

Fosbuvir Project

The company considers development of a new drug to treat Hepatitis C, code-named the Fosbuvir Project. Fosbeck has already spent$420 Mon preliminary research for drug development and it will need another$600 Mon development this year (tax deductible) and$2 Bin CapExnext year (these cash outlays are not part of the cash flows that you have estimated earlier, because this project is not approved yet). Capital expenditures will be depreciated over 10 years using straight line depreciation.

The patent for the drug is pending and the company expects to receive an FDA approval and start selling the drug in two years. Itsexpectedrevenues in the first year of sales are$1 Bwith subsequent annual growth of50%over the next three years, after which the sales will be stable for another7years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are estimated to be15%of revenues and SG&A expenses are$2 Ba year if the drug is produced and zero otherwise.

Expected revenues and expenses take into account the uncertainty of getting the patent and FDA approval. The company estimates the probability of getting the approval in two years is10%(i.e., if the company gets the approval the revenue is$10 B, if it does not, the revenue is zero). Even if Fosbuvir gets approved by FDA, each year there is a5 %probability of the patent becoming obsolete due to a new drug entering the market, in which case the revenues, as well as CoGS and SG&A expenses will drop to zero.

NPV and IRR

Please estimate the NPV and IRR of the Fosbuvir Project, using the company's WACC of12%.

Crystal Ball

Your next task is to evaluate the Fosbuvir Project using Crystal Ball simulation (see the template) based on probability of FDA approval in two years and patent obsolescence in each subsequent year. Alternatively you are welcome to use Random Data generator in Data Analysis Pack.

What is the probability of a positive NPV?

Please discuss the riskiness of the project.

Real Option

One of your colleagues pointed out that instead of starting construction before the FDA approval, the company can invest only$0.8 Bnext year (depreciated over 10 years) and delay the remaining$1.2 Binvestment (depreciated over 8 years) for two years until the drug gets approved. Only if the drug gets approved will Fosbeck proceed with the second stage investment, which will take place in three years. The sales will commence in four years at the level of$10 Bwith subsequent annual growth of50%over the next three years, after which the sales will be stable for another5years - due to delay the company will lose two years of revenues. The probability of patent obsolescence remains the same as before -5%each year.

What is the NPV of this two-stage investment?

Is the option to delay the project valuable? Explain.

Pharmaset, Inc. Acquisition

The reason of the low probability of FDA approval for Fosbuvir is that another company, Pharmaset, Inc., is working on a similar drug, called FosbuvirP, and is very close to getting FDA approval and a patent. If Pharmaset gets a patent, Fosbeck's own application will be denied. Therefore, instead of developing Fosbuvir internally, Fosbeck can acquire Pharmaset. Pharmaset already has manufacturing facilities in place and FosbuvirP is its only product. The book value of the company's fixed assets is$3 B, which will be depreciated using the straight-line depreciation over the next 10 years. Pharmaset expects to receive the FDA approval and patent by the end of this year with sales starting next year. Its next year revenues are expected to be$4 B($10 Brevenue in case of success times the40%probability of success) with subsequent annual growth of50%over the next three years, after which the sales will be stable for another7years. After that the drug will lose the patent protection and its manufacturing is expected to stop. The CoGS are expected to be15%of revenues and SG&A expenses are$3.5 Ba year if the drug is produced and zero otherwise. In other words, in case of FDA approval Pharmaset's revenues and costs will be similar to Fosbeck's, but SG&A expenses will be higher. If Fosbeck were to acquire Pharmaset, it would be able to bring SG&A costs down to Fosbeck's level. The probability of FDA approval is40%and the probability of patent obsolescence remains the same as before -5%each year.

Mergers and Acquisitions. Target (Pharmaset) Valuation

Pharmaset's management would be open to the sale in the valuation range of$ 20 to 24 Billion. Please estimate Pharmaset's value to Fosbeck, if it gets acquired.

Recommendations

Upon reviewing Fosbeck's choices, what project(s) would you recommend?

Venture Capital Financing

Finally, to further reduce its risk Fosbeck considers keeping acquired Pharmaset as a separate company. In this case Fosbeck will eventually shift its R&D to Pharmaset, which will continue as a viable business even after the initial patent expires.Therefore, we can ignore the probability of a patent becoming obsolete. However, if FDA approval is not received this year, Pharmaset will go bankrupt, in which case its assets will be sold at residual book value.

A venture capital (VC) firm Menlo Ventures is willing to provide financing of up to$5 Bin acquisition of Pharmaset.

If the VC agrees to invest in Pharmaset, it plans to exit after eight years at which time it expects that the company's value would beeight timesits year 8 EBIT.

Menlo Ventures offers three different ways of structuring the financing:

1.Straight common stock where the VC will not receive any dividend for the first four years and will receive 20% of NOPAT as a dividend for the remaining four years. The tax rate for Pharmaset is38%.In addition, the VC will receive a20%ownership of the company's equity at the end of eight years. In the case of bankruptcy20%ownership of the company's equity will apply to the book value immediately

2.Redeemable convertible debt with10%coupon rate (interest is tax-deductible). The debt will be converted for15%ownership of the equity of Pharmaset at the end of eight years. In the case of bankruptcy the debt will be immediately redeemed at its face value or at the residual assets' book value, whichever number is lower.

3.Redeemable preferred stock with7.5%dividend plus warrants for15%of the equity for an exercise price of$150 M.In the case of bankruptcy the debt will be immediately redeemed at its face value or at the residual assets' book value, whichever number is lower.