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The document outlines two investment opportunity that is lying at the disposal of ALL CURE Inc. The projects are T-REC and P-REC. P-REC has not been clinically tested and the side impact of the same shall appear on the body pf persons who consume it while for T-REC, the probability of such mishap are less and no such side impact in long term. The report includes both quantitative analysis and qualitative analysis with greater focus on qualitative analysis.
This part outlines the qualitative i.e numerical analysis of the P-REC & T-REC based on certain assumptions. The assumptions undertaken have been highlighted here-in-below:
Bases on the stated assumptions, the quantitative analysis of P-REC & T-REC has been carried on the basis of four capital budgeting tools. The same has been enumerated here-in-below:
As far as P-REC is considered, it shall be seen based on the Appendix-1 that when the proposed inflow of cash has been discounted at 18% and 24% the discounted payback period of the project is 5.25 years and 6.43 years respectively and the same is greater than 5 years. A brief version of the said computation has been outlined here-in-below:
Sl NO |
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Terminal Value |
1 |
Operating Cash flow before Tax |
-2890000 |
748060 |
748060 |
748060 |
748060 |
1336060 |
1336060 |
1336060 |
1336060 |
310000 |
2 |
Tax |
|
-224418 |
-224418 |
-224418 |
-224418 |
-400818 |
-400818 |
-400818 |
-400818 |
27600 |
3 |
Depreciation |
|
306000 |
306000 |
306000 |
306000 |
306000 |
306000 |
306000 |
306000 |
|
4 |
Net Operating Cash flow |
-2890000 |
829642 |
829642 |
829642 |
829642 |
1241242 |
1241242 |
1241242 |
1241242 |
337600 |
5 |
Discounting Factor @18% |
1 |
0.847458 |
0.718184 |
0.608631 |
0.515789 |
0.437109 |
0.370432 |
0.313925 |
0.266038 |
0.266038164 |
6 |
Discounted Cash Flow |
-2890000 |
703086.4 |
595836 |
504945.7 |
427920.1 |
542558.3 |
459795.2 |
389656.9 |
330217.7 |
89814.48408 |
7 |
Net Present Value |
1153831 |
|
|
|
|
|
|
|
|
|
8 |
Cumulative |
-2890000 |
-2186914 |
-1591078 |
-1086132 |
-658212 |
-115653 |
344141.8 |
733798.7 |
1064016 |
1153830.921 |
9 |
Discounted Pay back period |
|
|
|
|
|
|
5.251532 |
|
|
|
10 |
Discounting Factor @24% |
1 |
0.806452 |
0.650364 |
0.524487 |
0.422974 |
0.341108 |
0.275087 |
0.221844 |
0.178907 |
0.178906664 |
11 |
Cumulative |
-2890000 |
-2220934 |
-1681364 |
-1246228 |
-895311 |
-471914 |
-130464 |
144898 |
366964.4 |
427363.3353 |
12 |
Discounted Pay back period |
|
|
|
|
|
|
|
6.473792 |
|
|
On the other hand for T-REC, it shall be pertinent to note that discounted payback period is beyond 8 years when project is discounted @24% while the same is 7.024 years when discounted @18% (Anon., 2018). A brief computation has been outlined here in-under:
Computation of Net Present Value for T-REC |
|||||||||||
Sl NO |
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Terminal Value |
1 |
Net cash flow |
-2890000 |
956300 |
922000 |
766600 |
618200 |
578300 |
560800 |
535600 |
504800 |
337600 |
2 |
Discounting Factor @18% |
1 |
0.847457627 |
0.718184 |
0.608631 |
0.515789 |
0.437109 |
0.370432 |
0.313925 |
0.266038 |
0.266038164 |
3 |
Discounted Cash Flow |
-2890000 |
810423.7288 |
662166 |
466576.4 |
318860.7 |
252780.3 |
207738 |
168138.2 |
134296.1 |
89814.48408 |
4 |
Cumulative |
-2890000 |
-2079576.271 |
-1417410 |
-950834 |
-631973 |
-379193 |
-171455 |
-3316.6 |
130979.5 |
220793.9465 |
5 |
Discounted Payback period |
|
|
|
|
|
|
|
|
7.024696 |
|
6 |
Discounting Factor @24% |
1 |
0.806451613 |
0.650364 |
0.524487 |
0.422974 |
0.341108 |
0.275087 |
0.221844 |
0.178907 |
0.178906664 |
7 |
Discounted Cash Flow |
-2890000 |
771209.6774 |
599635.8 |
402071.9 |
261482.3 |
197262.6 |
154268.7 |
118819.8 |
90312.08 |
60398.88991 |
8 |
Cumulative |
-2890000 |
-2118790.323 |
-1519155 |
-1117083 |
-855600 |
-658338 |
-504069 |
-385249 |
-294937 |
-234538.2196 |
9 |
Discounted Payback period |
Never Paid off |
Net Present Value: Net present Value is the most important tool under capital budgeting. In the said tool the discounted cash flow realised over the life of the project is reduced from the initial outlay. If the NPV is positive, the project is viable otherwise not. Further, the higher the value of NPV, the viable the project is. In addition, the rate for discounting the project shall be the project cost of capital.(CFI Education Inc., 2018)The simple formula for Net Present Value has been stated here-in-below:
Net Present Value = Present value of Inflows – Present Value of Out flows.
As far as P-REC is considered, it shall be seen based on the Appendix-1 that when the proposed inflow of cash has been discounted at 18% and 24% the NPV of the project is $ 1,153,831 and $427,363 respectively A brief version of the said computation has been outlined here-in-below:
Year |
Cash flows @18% |
Cash flows @24% |
0 |
-2890000 |
-2890000 |
1 |
703086 |
669066 |
2 |
595836 |
539569 |
3 |
504946 |
435137 |
4 |
427920 |
350917 |
5 |
542558 |
423397 |
6 |
459795 |
341449 |
7 |
389657 |
275362 |
8 |
420032 |
282465 |
Total |
1153831 |
427363 |
On perusal it can be seen that P-REC has positive net present value under both 18% and 24% discounting rate.
On the other hand for T-REC, it shall be pertinent to note that Net Present Value is negative when project is discounted @24% and stands at -$2,34,538/- while the same is $2,20,794/- when discounted @18%. A brief computation has been outlined here in-under:
Year |
Cash flow @18% |
Cash flow @24% |
0 |
-2890000 |
-2890000 |
1 |
810423.7288 |
771209.6774 |
2 |
662166.0442 |
599635.796 |
3 |
466576.427 |
402071.9345 |
4 |
318860.6826 |
261482.2782 |
5 |
252780.2597 |
197262.6061 |
6 |
207738.0072 |
154268.7264 |
7 |
168138.2478 |
118819.7877 |
8 |
224110.5491 |
150710.9741 |
Total |
220793.9465 |
-234538.2196 |
On perusal it can be seen that T-REC has positive net present value under 18% discounting rate and it is not feasible @24% discounting rate
Present Value of Cash outflow on the project= Present Value of inflows from the project at a discounting rate which is equal to internal rate of return.
On the basis of above methodology, the discounting rate at which inflow is equal to outflow for P-REC is 28%. The brief overview of the same has been highlighted here-in-under:
Year |
Cash Flows |
0 |
-2890000 |
1 |
829642 |
2 |
829642 |
3 |
829642 |
4 |
829642 |
5 |
1241242 |
6 |
1241242 |
7 |
1241242 |
8 |
1473242 |
IRR |
28% |
IRR of project is greater than 24% and hence feasible.
While on the other hand, the IRR for T-REC is 21%. The brief overview of the same has been highlighted here-in-under:
Year |
Cash Flows |
0 |
-2890000 |
1 |
956300 |
2 |
922000 |
3 |
766600 |
4 |
618200 |
5 |
578300 |
6 |
560800 |
7 |
535600 |
8 |
842400 |
IRR |
21% |
IRR of project is less than 24% and hence not feasible.
As far as P-REC is considered, it shall be seen based on the Appendix-1 that when the proposed inflow of cash has been discounted at 18% and 24% the PI of the project is 1.399 and 1.148 respectively.
As far as T-REC is considered, it shall be seen based on the Appendix-1 that when the proposed inflow of cash has been discounted at 18% and 24% the PI of the project is 1.076 and .9188 respectively.
In the case of T-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.076 and .9188 respectively.
Accordingly, it shall be concluded that T-REC is not feasible @ 24% discounting rate.
While analysing the qualitative factors of the project, it shall be pertinent to note that the same is based on probable impact that factors like management, government etc have on the proposed project. Further, in the present case the analysis has been limited to long term impact of the project and proposed issues that might crop up in case of failure. The same has been highlighted here-in-below:
On the basis of above, it shall be concluded that though P-REC seems profitable and better than T-REC on quantitative front while the same may not be feasible on the qualitative factor and may tarnish the image of the company in the long run. Accordingly, the same is not feasible and T-REC shall be produced if the cost of capital is less than 21%
Further, a detail comparison of quantitative analysis is described here-in-under:
Sl No |
Particular |
P-REC |
T-REC |
1 |
Discounted Pay Back period @18% |
5.251532 |
7.024696201 |
2 |
Discounted Pay Back period @24% |
6.473792 |
Never Paid off |
3 |
Net Present Value @18% |
1153831 |
220793.9465 |
4 |
Net Present Value @24% |
427363.3 |
-234538.2196 |
5 |
Internal Rate of Return |
28% |
22% |
6 |
Profitability Index @18% |
1.40 |
1.08 |
7 |
Profitability Index @24% |
1.15 |
0.92 |
The company shall consider long run and shall produce T-REC even though the same is less feasible on monetary as presented above as the same has very less risk compared to P-REC
Company shall produce T-REC based on reason stated above. Further, the company shall thing of long term vision and carry on research on P-REC to develop it further before launching the same in the market as Pharmaceutical sector is prone to litigation and risk measures.
AccountingExplained.com , 2013. Profitability Index. [Online] Available at: https://accountingexplained.com/managerial/capital-budgeting/profitability-index [Accessed 2 October 2018].
Anon., 2018. Payback Period & Discounted Payback Period | Formula | Example. [Online] Available at: https://www.wallstreetmojo.com/payback-period-discounted-payback-period/ [Accessed 1 October 2018].
CFI Education Inc., 2018. Internal Rate of Return (IRR). [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/finance/internal-rate-return-irr/
[Accessed 2 October 2018].
CFI Education Inc., 2018. Net Present Value (NPV). [Online] Available at: https://corporatefinanceinstitute.com/resources/knowledge/valuation/net-present-value-npv/
[Accessed 2 October 2018].
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