The management team of Bonkers Biochem is considering whether they should move forward with an investment in a potential treatment for Alzheimer's. There are two phases in the investment, the testing phase and the production phase. The testing phase will cost $1 billion and last for one year. The production phase will have the following characteristics: -A $1.5billion initial investment -10 years of production and sales -Annual sales of $12 billion every year, with $3billion in variable costs -Annual $1 billion of fixed costs -Annual $0.8billion of depreciation-25% tax rate-12% cost of capital Bonkers Biochem will only move forward with the production phase if the testing phase proves successful. The likelihood of success is 6%. What is the yearly cash flow of the production phase (years 2-11), assuming a successful testing phase (in year 1)? What is the yearly cash flow of the production phase (years 2-11), assuming a successful testing phase (in year 1)? $5.6 billion $6.2 billion O $7.8 billion $8.4 billion Question 5 (0.145 points) Saved What is the payoff of a successful test? I.e. what is the NPV of just the production phase? O $33.53 billion $28.14 billion Question 6 (0.145 points) Saved What is the NPV at Year O? Should Bonkers Biochem move forward with testing? $0.16 billion; Yes -$0.42billion; No 0-$0.24billion; No $0.30billion; Yes Question 7 (0.145 points) Calculate the break-even cash flow for a project with an initial investment of $560,000 that will generate cash flows for 8years. Assume a 7.5% cost of capital. $89,593 $92,709 The management team of Bonkers Biochem is considering whether they should move forward with an investment in a potential treatment for Alzheimer's. There are two phases in the investment, the testing phase and the production phase. The testing phase will cost $1 billion and last for one year. The production phase will have the following characteristics: -A $1.5billion initial investment -10 years of production and sales -Annual sales of $12 billion every year, with $3billion in variable costs -Annual $1 billion of fixed costs -Annual $0.8billion of depreciation-25% tax rate-12% cost of capital Bonkers Biochem will only move forward with the production phase if the testing phase proves successful. The likelihood of success is 6%. What is the yearly cash flow of the production phase (years 2-11), assuming a successful testing phase (in year 1)? What is the yearly cash flow of the production phase (years 2-11), assuming a successful testing phase (in year 1)? $5.6 billion $6.2 billion O $7.8 billion $8.4 billion Question 5 (0.145 points) Saved What is the payoff of a successful test? I.e. what is the NPV of just the production phase? O $33.53 billion $28.14 billion Question 6 (0.145 points) Saved What is the NPV at Year O? Should Bonkers Biochem move forward with testing? $0.16 billion; Yes -$0.42billion; No 0-$0.24billion; No $0.30billion; Yes Question 7 (0.145 points) Calculate the break-even cash flow for a project with an initial investment of $560,000 that will generate cash flows for 8years. Assume a 7.5% cost of capital. $89,593 $92,709
