Skincare Inc. has developed a cream that will diminish the effects of aging. Skincare has spent $2,000,000 on research and development and $2,100,000 for clinical trials. Once the authority approves the cream, it will have a 5-year life cycle. Joa Smith, Skincares chief financial officer, must determine the best alternative for the company among three following options:

Option 1-choose to develop, manufacture, package, and distribute the drug.

Option 2-choose to develop and outsource only manufacturing.

Option 3-sell the drugs patent.

Skincare has compiled the following annual cost information for this drug if the company were to manufacture it:

Cost Category	Fixed Costs	Variable Cost per unit
Manufacturing	$4,000,000	$65.00
Packaging	$280,000	25.00
Distribution	$1,500,000	7.50
Advertising	$2,250,000	8.50

Management anticipates a high demand for the drug and has benchmarked $200 per unit as a reasonable price base on other drugs that promise similar results. Management expects a sales volume of 1,000,000 units per year for the next four years from its introduction in the market.

Suppose Skincare chooses to outsource manufacturing the drug while continuing to package, distribute, and advertise it. In that case, the manufacturing costs will result in fixed costs of $2,350,000 and variable cost per unit of $70. In the case of the patent sale, Skincare would receive $200,000,000 in the development year and $25,000,000 at the end of every year for the next four years.

Question 3.1

Calculate Life-Cycle costs of the drug, assuming that Skincare will develop, manufacture and market the product. Based on your calculation, suggest whether Skincare should develop the drug

Question 3.2

Determine the best option for Skincare. What qualitative factor Skincare would consider in determining the best option

Question 3.3

In order to determine the real value of any of the options that you have considered in requirement 2, one should calculate the present value of the income streams. Discuss the statement. Justify your answer by showing the present value of the cash inflow from selling the patent (option 3). In your calculation, assume 8% discount rate for four years. The present value of annuity $1.00 with 8% for four years is 3.312. [5 marks]