You are a financial analyst working in the office of the CFO of Jupiter Pharma Ltd. Your company has been working on R and D, and test marketing of a new OTC medicine for the last 15 months, and have already spent Rs 2 crore on it.

Now the company needs to take a decision, on whether to launch the product commercially in the market, or scrap it.

The additional equipment required for manufacturing the new product is estimated to cost Rs 12 crore, and additional working capital required is estimated to be 2 months of annual sales.

Sales in the first year are expected to be Rs 10 crore, and expected to increase each year by 20%. Material cost is 30% of sales, direct labour is 10% of sales. Other manufacturing cost is estimated to be Rs 1 crore p.a. Since it is an OTC product in a highly competitive market, you estimate that the sales promotion expense would be quite high at 15% of sales. Depreciation is at 20% WDV. Jupiters effective tax rate is 30%.

You estimate that after the launch of the new product, one of the existing old products of Jupiter will have to be discontinued. This old product had sales of Rs 3 crore p.a., and used to give a contribution margin of 30%.

Equipment for the manufacture of the new product will be housed in an existing warehouse owned by the company, which had been so far fetching a rental income of Rs 75 lac p.a. for the company.

The total corporate overheads of Jupiter are Rs 4.50 crore. For the sake of management accounting, the corporate overheads are allocated to each product in proportion to its sales. The sales of the new product are expected to constitute approx. 9% of the total company sales.

The project is expected to have a life of 5 years, at the end of which the equipment is expected to be sold at a salvage value of 10% of its original cost. Working capital is expected to be recovered at book value at the end of 5 years.

Q1.Based on all the above facts, prepare the detailed cashflow of Jupiter clearly showing all the assumptions. (12 marks)

Q2. If the cost of capital of Jupiter is 18%, calculate the NPV of the project. Would you go ahead with this project? (3 marks)