MACRS Depreciation % 5 year 7 Year 10 year 20.00% 14.29% 10.00% 32.00% 24.49% 18.00% 19.20% 17.49% 14.40% 11.52% 12.49% 11.52% 11.52% 8.93% 9.22%…

The A-Plus pharmaceutical company hascompleted the scientific work on a new product. Theinvestment needed for development of this completed research into a marketable product is being proposed.All the relevant data is shown in the data block and financial statements below. This is followed by the analysis needed to determine the present worth and internal rate of return. a The COGS estimate and particularly the “Cost reduction each year” of $5 has been questioned. Determine the sensitivity of the present worth to this annual reduction. Use values of the “Cost reduction each year” from the forecasted value of $5.00 down to $3.00 in 50 cent intervals. b Determine the “cost of reduction each year” that results in the breakeven present worth (PW = 0). Data Block Investment $3,500,000 in year 0 depreciation 5-year MACRS salvage value $0 in year 4 0 1 2 3 4 5-year MACRS 20.00% 32.00% 19.20% 11.52% Depreciation $700,000 $1,120,000 $672,000 $403,200 Book value $3,500,000 $2,800,000 $1,680,000 $1,008,000 $604,800 Ending Asset Value $2,000,000 Revenues and COGS Quantity Sold 20000 20000 20000 20000 Price each $100 $100 $100 $100 Revenue $2,000,000 $2,000,000 $2,000,000 $2,000,000 Cost reduction each year $5.00 starting in year 2 Cost each $45 $40 $35 $30 COGS $900,000 $800,000 $700,000 $600,000 Expenses SG&A $250,000 $250,000 $250,000 $250,000 Working Capital Working capital $500,000 $500,000 $400,000 $350,000 $300,000 Change in Working Capital $500,000 $0 ($100,000) ($50,000) ($50,000) Rates and Time Horizon MARR 10% Income Tax rate 20% Capital Gains Tax rate 15% Time Horizon 4 years Income Statement Year 0 1 2 3 4 Revenue $2,000,000 $2,000,000 $2,000,000 $2,000,000 COGS ($900,000) ($800,000) ($700,000) ($600,000) Gross Margin $1,100,000 $1,200,000 $1,300,000 $1,400,000 SG&A ($250,000) ($250,000) ($250,000) ($250,000) Depreciation ($700,000) ($1,120,000) ($672,000) ($403,200) EBIT $150,000 ($170,000) $378,000 $746,800 Taxes ($30,000) $34,000 ($75,600) ($149,360) Net Income $120,000 ($136,000) $302,400 $597,440 Cash Flow Statement Year 0 1 2 3 4 Operations Net Income $120,000 ($136,000) $302,400 $597,440 Depreciation $700,000 $1,120,000 $672,000 $403,200 Total Operations activities $0 $820,000 $984,000 $974,400 $1,000,640 Investment Working Capital ($500,000) $0 $100,000 $50,000 $50,000 Working capital Recovery ($300,000) Investment ($3,500,000) Salvage $0 Salvage $0 Ending Value $2,000,000 Ending Value $2,000,000 Tax on gain ($209,280) -Book Value ($604,800) Total Capital activities ($4,000,000) $0 $100,000 $50,000 $1,540,720 Gain $1,395,200 Cash Flow ($4,000,000) $820,000 $1,084,000 $1,024,400 $2,541,360 Tax ($209,280) Present Worth IRR $146,752 11.41% 48uÞª
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