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: Please present your recommendations in a report written for your supervisor, the firm Controller. Clearly show your analysis and communicate your conclusions and recommendations. Support your report by calculations in the Excel spreadsheets. In your report, explain the results of each portion of your analysis (represented by the tabs on the Excel template). Submit all the completed Excel worksheets with the completed responses to the questions posed to support your report and recommendation. Steps to Completion: Individual Project Analysis Your first task is to analyze the companys three projects and provide your recommendations about their implementation. Automation project One of Fosbecks plants is trying to decide whether to automate its drug manufacturing by purchasing a fully automated bioreactor machine complex. The proposed machine costs $400 M and 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 for 25% 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 M from reduced labor costs, $10 M per year from reduced waste disposal costs, and $80 M per year from the sales byproduct of bioreactor process net of selling expenses. Fosbeck requires a 12% of return from its investment and has a 35% 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 be 10% to 50% 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 projected 40% Decrease by 10% 30% Decrease by 30% 20% Decrease by 50% 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?

Fosbeck's Automation Project
Given				MACRS Schedule
Investment cost (today)	($400.00)			year 1	33%
Project life	5			year 2	45%
Annual labor costs savings	$50.00			year 3	15%
Annual waste disposal cost savings	$10.00			year 4	7%
Annual Byproduct sales	$80.00
Required rate of return	12%
Tax rate	38%
Solution
Basic Analysis (All numbers in $ Mil)	Year
Cash flow estimation	0	1	2	3	4	5
Investment	($400.00)
Annual labor costs savings
Annual waste disposal cost savings
Annual Byproduct sales
EBITDA
Less: Depreciation		($132.00)	($180.00)	($60.00)	($28.00)	$0.00
Additional EBIT (including salvage value)
Less: Taxes
NOPAT
Plus: Depreciation
FCF
NPV
IRR
Analysis
Scenario Analysis
Sales and NPV numbers are in $ Mil
Scenario	probability	Byproduct Sales	NPV	IRR
Base
Byproduct sales decrease by 10%
Byproduct sales decrease by 30%
Byproduct sales decrease by 50%
Expected NPV
Breakeven
Breakeven byproduct sales