Question
Using the template below, please provide answers in excel template One of your colleagues pointed out that instead of starting construction before the FDA approval,
Using the template below, please provide answers in excel template
One of your colleagues pointed out that instead of starting construction before the FDA approval, the company can invest only $0.8 B next year (depreciated over 10 years) and delay the remaining $1.2 B investment (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 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 5 years 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?
Two-stage investment alternative can be evaluated by simply calculating the NPV for two different outcomes (FDA approval or not) and then finding the expected value. Alternatively a Monte Carlo simulation can be used (see below). To check your calculations look at expected NPVs found using these two approaches - they should be nearly identical.
Is the option to delay the project valuable? Explain. Please show excel formula and calculations using the template below.
| CoGS ratio | 15% | ||||||||||||
| growth | 50% | ||||||||||||
| SGA | $2.00 | ||||||||||||
| CapEx | $2.00 | ||||||||||||
| Revenue1 | $10.00 | ||||||||||||
| Project Life | 10 years | ||||||||||||
| Tax rate | 38% | ||||||||||||
| R&D | $0.60 | ||||||||||||
| probability of approval | 10% | ||||||||||||
| probability of obsolescence | 5% | ||||||||||||
| WACC | 12% | ||||||||||||
| Real Option Modification | Depreciation | ||||||||||||
| CapEx 1 | $0.80 | 10 years | |||||||||||
| CapEx 2 | $1.20 | 8 years | |||||||||||
| Two-stage investment alternative can be evaluated by simply calculating the NPV for two different outcomes (FDA approval or not) and then finding the expected value. Alternatively a Monte Carlo simulation can be used. To check your calculations look at expected NPVs found using these two approaches - they should be nearly identical. | |||||||||||||
| Evaluating two outcomes separately | |||||||||||||
| If approved by FDA (project can still get obsolete in later years) | |||||||||||||
| Year | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | |
| Probability of Success | |||||||||||||
| Revenue | |||||||||||||
| Cost | |||||||||||||
| SGA | |||||||||||||
| R&D | |||||||||||||
| Depreciation | |||||||||||||
| EBIT | |||||||||||||
| Taxes | |||||||||||||
| Net Income | |||||||||||||
| OCF | |||||||||||||
| CapEx | |||||||||||||
| FCF | |||||||||||||
| NPV | |||||||||||||
| IRR | |||||||||||||
| If FDA does not approve (project fails) | |||||||||||||
| Year | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | |
| Probability of Success | |||||||||||||
| Revenue | |||||||||||||
| Cost | |||||||||||||
| SGA | |||||||||||||
| R&D | |||||||||||||
| Depreciation | |||||||||||||
| EBIT | |||||||||||||
| Taxes | |||||||||||||
| Net Income | |||||||||||||
| OCF | |||||||||||||
| CapEx | |||||||||||||
| FCF | |||||||||||||
| NPV | |||||||||||||
| IRR | |||||||||||||
| Expected NPV | |||||||||||||
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Financial Analysis With Microsoft Excel
Authors: Timothy R. Mayes
9th Edition
0357442059, 9780357442050
