This is an individual assignment. This means that you are required to write your own answers to the questions, the
Turnitin system checks for copied work.
Hilary Maskona, the CEO of AllVax, met with her advisor, Vincent Purell, to review a capital
–
expenditure proposal on a
production plant to produce COVID
–
19 vaccines using mRNA technology
. The proposal, named AntiCov Flow project, calls for
an expenditure of $9 million spread over three years to convert an existing production plant from batch to continuous
–
flow
technology and to install sophisticated state
–
of
–
the
–
art process controls throughout the plant. This project is only feasible with a
continuous source of cationic lipids from a chemical synthesis process conducted in a specialised manufacturing facility
. The
proposal suggests AllVax to purchase this type of manufacturing facility from a supplier (rather than sourcing the cationic lipids
from two separate suppliers)
. AllVax has an option to exclusively purchase the cationic lipids facility from a supplier for $4
million (included in the proposed $9 million expenditure)
. The option was purchased several years earlier. Vincent advises the
CEO that a comparable cationic lipids manufacturing facility can be sold today for $7 million in an auction. Vincent also forecasts
that at the end of the project, the value of the cationic lipids manufacturing facility will be $30 million. This option will expire
in 5 months.
The proposal will require the plant to be shut down for 5 months in the 1
st
year, 4 months in the 2
nd
year, and 3 months in the 3
rd
year. Vincent believes the loss will not be permanent. The benefits include an increase of 6% in new output gain on old output
[new output
=
old output x (1+6%)] and an increase of 3% in gross margin on old gross margin of 11.5% (new gross margin
=
old gross margin + gross margin increase)
. The increased outputs will necessitate additional work
–
in
–
process inventory in value
to 3% of the increased cost of goods. Vincent suggests that new assets will be fully depreciated on a straight
—
line basis over the
life of the project. It is AllVax
’
s policy to record depreciation expenses in the same year as expenditures. Vincent also estimates
that overhead costs are at 3.5% of the increased sales. Inflation is set at 0%.
It is AllVax
’
s policy to evaluate projects based on four criteria: (1) net present value, (2) internal rate of return, (3) payback, and
(4) growth in earnings per share. Your task is to examine Vincent
’
s analysis and make adjustments where necessary
.
1. Provide a quantitative analysis of the AntiCov Flow project by completing the AntiCov Flow spreadsheet provided. (7
marks)
2. Provide your estimates of each of the following project selection methods: (1) Net Present Value (NPV), (2) Internal
Rate of Return (IRR), (3) payback, and (4) growth in earnings per share (EPS)
. Pick two methods that you think most
appropriate to evaluate the project? Justify your choices.
See References for a summary of the first three methods. The growth in EPS in method (4) is based on the average
annual EPS contribution of a project over its entire economic life, using the number of outstanding shares at the most
recent fiscal year
–
end (FYE) as the basis for the calculation. The project is deemed feasible if the contribution to the net
income from the contemplated project is positive.
(5 marks)
3. An executive vice president of AllVax recently proposed that the company should consider a project in Alt Zeneca
(based on the Alt Zeneca spreadsheet provided)
. There is no need to adjust this worksheet. AllVax only has resources
to invest in either the AntiCov Flow project or the Alt Zeneca project. Hilary has asked you to evaluate the Alt Zeneca
project as she does not trust Vincent. You need to evaluate the Alt Zeneca project based on four criteria: (1) net present
value, (2) internal rate of return, (3) payback, and (4) growth in earnings per share. Provide your estimates of each of
these project selection methods. (4 marks)
4. What should you do when NPV and another valuation method (out of those presented in question 2) disagree in ranking
mutually exclusive projects? Did this occur for our comparison between the AntiCov Flow and Alt Zeneca projects?
You then need to advise Hilary on which project to invest and provide reasons for your decision. (6 marks)
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