Reference no: EM132764370
Novo Nordisk A/S is a healthcare company engaging in the discovery, development, and manufacture of pharmaceutical products. Its specialty is diabetes care and its headquarters are in Bagsvaerd, Denmark. The company sells its products all over the world, including in the United States, Japan, China, Russia, India, and Europe. As a new member of the capital budgeting division of Novo Nordisk A/S, you have been asked to determine the net cash flows and NPV of a proposed new diabetes drug. The drug is expected to be on the market for three years only, because Novo expects to launch a new and better version of the drug in the near future. If the project is initiated, it will require an expenditure on research and development of 4% of the total amount that Novo spent on research and development in the last financial year. Also, an investment in a new production facility, which is estimated to cost $24 million, will be necessary. The product revenues for years 1,2, and 3 are expected to be 0.8%, 0.6%, and 0.4%, respectively, of the total revenue of Novo for the last financial year. The cost of goods sold is projected to be $8 million in years 1 and 2, but only $5 million in year 3. Finally, the selling, general, and administrative costs are assumed to be $3 million in years 1 and 2, but only $2 million in year 3. Novo has decided that the investment in the production facility should be depreciated with the straight-line method over the life of the project. In years 1 to 3, the inventory of the project is $1.5 million, receivables are 15% of the project revenues, and payables are 20% of the project's cost of goods sold. Assume that the project requires no cash. Also assume that the net working capital starts immediately and is settled the year after the project ends.
1. Calculate the Net Present Value (NPV) of the project assuming that the cost of capital is 12%.
2. Make a plot of the NPV as a function of the cost of capital and determine the Internal Rate of Return (IRR) of the project.
3. Conduct relevant sensitivity and scenario analysis and make your recommendations on whether the company should embark on this project.
You can obtain the financial statements of Novo Nordisk from https://finance.yahoo.com