Reference no: EM132968822

You are heading the R&D department of a growing biotech company. You have identified an investment opportunity that would require a $5 million investment upfront in terms of personnel and lab equipment and subsequent cash outflows of $500,000 per year. The company did a market study that suggests a cash revenue stream of $2.15 million per year for three years and then $1.6 million per year for another three years. At the end of the sixth year, it is estimated that the lab equipment could be sold for a salvage value of $200,000. Assume that all of the cash flows are net of taxes. In terms of risk, the project would be similar to others in the firm, which uses a hurdle rate of 18%.

Problem 1: From a purely economic perspective, should you invest in this project? is the NPV positive or negative?

Problem 2: What is the IRR of the project?

Problem 3: What is the payback period for this project?

Problem 4: What is the profitability index for this project?