Solution Library

Calculation Of NPV IRR And Payback Period For A Firm

Question

Neo Pharmaceuticals is a start-up pharmaceutical company focused on the development and commercialization of non-steroidal anti-inflammatory drugs world-wide. The company recently obtained FDA approval for one of its new drugs, vacuus poena and must now decide between a product launch in Europe or the United States. Since the company has spent the majority of its funding on the development of vacuus poena, it can only afford to market the new product in one geographic region. The company estimates that it will cost $250 million to launch the product in the U.S. and $50 million to establish a smaller presence in Europe. Management’s required payback period for this type of investment is 3.5 years. The Vice President of Marketing and Sales has estimated the future cash inflows by region in the table below.

Projected Cash Flow By Region

For R Vacuus Poena ($ millions)

Region

IRR

Launch Costs

2011

2012

2013

2014

2015

US

28%

$250

$ 35.40

$80.76

$129.80

$160.92

$176.15

Europe

37%

$50

$17.70

$22.28

$24.65

$31.03

$32.04

 

  • Calculate the company’s cost of capital using the following assumptions: i) the company can borrow money at 5% interest; ii) shareholders expect a 20% return on their investment; iii) 40% of the company is financed by debt and 60% by equity.

Cost of Capital =

  • The CFO of the company has mandated that all investment proposals use a hurdle rate equal to the cost of capital plus 4%. What is the net present value (NPV) for each region? Show all work used to arrive at answers.

NPVUS=

NPVEU=

  • What is the exact payback period for each region? Show all work used to arrive at answers. Round payback periods to one decimal place.
  • Which region would the company choose for a product launch if the decision were based solely on the payback period method?
  • Which region would the company choose for a product launch if the decision were based solely on the IRR method?
  • Which region would the company choose for a product launch if the decision is based on the NPV method? Explain why.

 

Summary

The question belongs to Finance and it discusses about calculating NPV, IRR, Payback period, etc for a firm.

Total Word Count 271

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.