LiveForever Biotechnology Corporation (LFBC) has a new potential drug developed by their research group.LFBC is debating whether to produce and sell the product themselves.The available information is listed below with production and sales to start in year 1.Depreciation is to be computed as straight line (no half year rule for straight line).
To simplify this question a little, assume that there is no salvage value.Working capital will be put in place during year 1 with Inventory being 20% of revenues, Accounts Receivable being 40% or revenues, and Accounts Payable being 65% of Costs of Goods Sold.All the working capital will be converted back into cash by the end of year 5.
Prepare an Income statement and Cash Flow Statement and determine the Present Worth and Internal Rate of Return of the proposal.
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Year |
1 |
2 |
3 |
4 |
5 |
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Sales Revenue Forecast (millions) |
$50.00 |
$75.00 |
$125.00 |
$200.00 |
$300.00 |
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Past research costs |
$100 |
million |
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Cost of production facilities |
$24 |
million |
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Start up costs (hiring, training, development) |
$12 |
million |
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Cost of Goods Sold (COGS) |
48% |
of revenues |
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Sales, General & Administrative (SG&A) |
$50 |
million annually |
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Depreciation (not in SG&A) |
5 |
years straight line |
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Inventory |
20% |
of revenues |
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Accounts Receivable |
40% |
of revenues |
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Accounts Payable |
65% |
COGS |
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MARR |
12% |
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Tax Rate |
20% |
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Facilities |
Startup |
Total |
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Investment |
$24 |
$12 |
$36 |
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