Investment Analysis with Contract Manufacturing

This assignment presents a case study analyzing the financial viability of a new investment project for a pharmaceutical company. The analysis involves calculating Net Present Value (NPV) and Internal Rate of Return (IRR) with and without incorporating contract manufacturing. It explores the impact of contract manufacturing on profitability and provides recommendations for decision-making based on the calculated financial metrics.

Running head: CORPORATE FINANCIAL MANAGEMENT
Corporate Financial Management
Name of the Student:
Name of the university:
Authors Note:

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CORPORATE FINANCIAL MANAGEMENT
Table of Contents
Answer to Question 1......................................................................................................................2
Answer to Question 2......................................................................................................................3
Answer to Question 3......................................................................................................................4
Reference.........................................................................................................................................9

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Answer to Question 1
Requirement 1: Net Present Value inclusive of Copntract manufacturing
Year 1 2 3 4 5 6
Increase in revenue:
Sales of new product 2,380,000 2,880,000 3,630,000 3,702,600.00 3,776,652.00 3,852,185.04
Contract manufacturing 460,000 510,000 585,000 596,700.00 608,634.00 620,806.68
(A) Increase in Revenue 2,840,000.00 3,390,000.00 4,215,000.00 4,299,300.00 4,385,286.00 4,472,991.72
Increase in expenditures:
Raw materials:
New products 714,000.00 864,000.00 1,089,000.00 1,110,780.00 1,132,995.60 1,155,655.51
Contract Manufacturing 115,000.00 127,500.00 146,250.00 149,175.00 152,158.50 155,201.67
Lost Sales net of variable cost 588,750.00 720,000.00 907,500.00 925,650.00 944,163.00 963,046.26
Wages 150,000.00 153,000.00 156,060.00 159,181.20 162,364.82 165,612.12
Factory overhead 511,200.00 610,200.00 758,700.00 773,874.00 789,351.48 805,138.51
Repaid and Maintenance 15,000.00 30,000.00 30,600.00 31,212.00 31,836.24
Advertisement 375,000.00 375,000.00 300,000.00 150,000.00 150,000.00 150,000.00
Preliminary Expenses 332,000.00
Interests 35,586.00 31,204.26 26,482.35 21,393.87 15,910.36 10,001.15
Depreciation on:
Equipment 176,666.67 176,666.67 176,666.67 176,666.67 176,666.67 176,666.67
Building 7,500.00 7,500.00 7,500.00 7,500.00 7,500.00 7,500.00
(B) Increase in Expenditure 3,005,702.66 3,080,070.92 3,598,159.02 3,504,820.74 3,562,322.43 3,620,658.13
Net Profit Before Tax 165,702.66- 309,929.08 616,840.98 794,479.26 822,963.57 852,333.59
Less: Tax @30% 92,978.72 185,052.29 238,343.78 246,889.07 255,700.08
Profit after tax 165,702.66- 216,950.35 431,788.69 556,135.48 576,074.50 596,633.51
Add: Depreciation 184,166.67 184,166.67 184,166.67 184,166.67 184,166.67 184,166.67
Net Cash Inflow 18,464.00 401,117.02 615,955.35 740,302.15 760,241.16 780,800.18
Present Value Factor@15% pa. 0.87 0.76 0.66 0.57 0.50 0.43
Present value of Net cash inflow 16,055.66 303,302.10 405,000.64 423,270.16 377,974.22 337,561.46
Particulars Amount Amount
Present value of total cash inflow 1,863,164.24$
Add: Present value of working capital realized 64,849.14$
Present value of salvage 86,465.52$
151,314.66$
2,014,478.90$
Less: Initial Investment 1,260,000.00$
Net Present Value (NPV) 754,478.90$
Year 0 1 2 3 4 5 6
On discounted cash flow 1,260,000.00- 30,838.26 312,300.20 412,825.09 430,210.10 384,129.65 343,021.06
On normal cash flow 1,260,000.00- 35,464.00 413,017.02 627,855.35 752,440.15 772,621.92 793,428.56

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Answer to Question 2
Requirement 2: Net Present Value exclusive of Copntract manufacturing
Year 1 2 3 4 5 6
Increase in revenue:
Sales of new product 2,380,000.00 2,880,000.00 3,630,000.00 3,702,600.00 3,776,652.00 3,852,185.04
Contract manufacturing
(A) Increase in Revenue 2,380,000.00 2,880,000.00 3,630,000.00 3,702,600.00 3,776,652.00 3,852,185.04
Increase in expenditures:
New products 714,000.00 864,000.00 1,089,000.00 1,110,780.00 1,132,995.60 1,155,655.51
Lost Sales net of variable cost 588,750.00 720,000.00 907,500.00 925,650.00 944,163.00 963,046.26
Wages 100,000.00 102,000.00 104,040.00 106,120.80 108,243.22 110,408.08
Factory overhead 428,400.00 518,400.00 653,400.00 666,468.00 679,797.36 693,393.31
Repaid and Maintenance 15,000.00 30,000.00 30,600.00 31,212.00 31,836.24
Advertisement 375,000.00 375,000.00 300,000.00 150,000.00 150,000.00 150,000.00
Preliminary Expenses 332,000.00
Interests 35,586.00 31,204.26 26,482.35 21,393.87 15,910.36 10,001.15
Depreciation on:
Equipment 176,666.67 176,666.67 176,666.67 176,666.67 176,666.67 176,666.67
Building 7,500.00 7,500.00 7,500.00 7,500.00 7,500.00 7,500.00
(B) Increase in Expenditure 2,757,902.66 2,809,770.92 3,294,589.02 3,195,179.34 3,246,488.20 3,298,507.22
Net Profit Before Tax 377,902.66- 70,229.08 335,410.98 507,420.66 530,163.80 553,677.82
Less: Tax @30% 21,068.72 100,623.29 152,226.20 159,049.14 166,103.35
Profit after tax 377,902.66- 49,160.35 234,787.69 355,194.46 371,114.66 387,574.48
Add: Depreciation 184,166.67 184,166.67 184,166.67 184,166.67 184,166.67 184,166.67
Net Cash Inflow 193,736.00- 233,327.02 418,954.35 539,361.13 555,281.32 571,741.14
Present Value Factor@15% pa. 0.87 0.76 0.66 0.57 0.50 0.43
Present value of Net cash inflow 168,466.08- 176,428.75 275,469.29 308,381.48 276,072.96 247,179.47
Particulars Amount Amount
Present value of total cash inflow 1,115,065.86
Add: Present value of working capital realized 64,849.14
Present value of salvage 86,465.52
151,314.66
1,266,380.52
Less: Initial Investment 1,260,000.00
Net Present Value (NPV) 6,380.52
Year 0 1 2 3 4 5 6 IRR
On discounted cash flow -1260000 178,466.08- 170,341.79 270,176.28 303,686.81 271,908.99 243,486.22 -3%
On normal cash flow -1260000 -205235.9953 225277.0209 410904.3547 531150.13 546906.1045 563198.4188 11%

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Answer to Question 3
Introduction
The optimum utilization of the resources that are available for the company is the primary
concern for the management of the company. Decisions relating to investment in different
investment proposals i.e. whether or not to buy new equipment; whether or not to invest on new
products are considered after directing tests that are related to appraisal of the investments on
such offers. The management of the company would like to invest only when the company could
earn the profit from an investment proposal then only they will go ahead with such investment.
Investmentappraisaltechniques:
The company is planning to make investment in developing a new medicine for adults
that would reduce their constipation problem without having any significant consequence. The
Austrochemicals Limited makes investment after conducting appraisal tests generally before
making the investment. At the time of making investment for development of any new medicine
some necessary parameters are required to be consideredwhich are Net Present Value and
Internal Rate of Returnthat would provide the financial resultrelating to investment at the same
time (Grinblatt and Titman 2016).
Investigation of the consequences of techniques relating to investment appraisal:
The management of the company have determined the IRR and NVP relating to the new
proposal. The new investment proposal that address the concern of Anna,have been shown into
different occasions that are mainly the calculation of Net Present Valueand Internal Rate of
Return (Pettyet al. 2015). Firstly there is the consideration that the equipment must utilize at its
fullest including agreement manufacturing of the item, while calculating the NPV and IRR of the

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project. Moreover in the second calculation there is assumption that the new equipment’s can
only beutilized for the purpose of developing new medicine so during the calculation of NPV
and IRR these particular points are taken into account while paying no attention to the expenses
and proceeds from the contract manufacturer.
FINANCIAL MANAGEMENT
NPV:
Theapproxima9te calculation of the total cash flow of the project through its period of
business while it is worth of money after the discount factor is being adjusted is called Net
Present Value (NPV). Therevenues and expenditure of agreement manufacture is of amount
$754478.90is considered as positive at the opening of the new documents in the field of
medicine and it clearly indicates that during the lifetime of six years the company can also earn
positive net cash entry from the project (Qiuet al. 2016). The small calculation of the NPV
provided below for the organization.
Particulars Amount Amount
Present value of total cash inflow
$
1,863,164.24
Add: Present value of working capital realized
$
64,849.14
Present value of salvage
$
86,465.52
$
151,314.66
$
2,014,478.90
Less: Initial Investment
$
1,260,000.00
Net Present Value (NPV)
$
754,478.90

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When the NPV is positive at that point, organization get convinced to invest in the
project. As estimation of the investment should be done in order to get better outcome of project
while not including the revenue and expenditure of the contract and while the management
should concerned with the ability of the fresh product so as to recover the initial investment.
A chart is given below for the analysis of the management while it does not included the
revenues and expenditure of the contract of the project NPV.
Particulars Amount Amount
Present value of total cash inflow 1,115,065.86
Add: Present value of working capital realized 64,849.14
Present value of salvage 86,465.52
151,314.66
1,266,380.52
Less: Initial Investment 1,260,000.00
Net Present Value (NPV) 6,380.52
When the expenditures and revenue of the contracting manufacturing are removed then
the expected NPV of project reduces significantly. The Net Present value under this system is
$6380.52. It is less than the NPV calculated in the above option. Therefore, it can be said that
this investment will not be profitable for the company (Brigham 2014).
Internal Rate of Return:
IRR can be termed as the internal rate of return which falls under two different state that
is without agreement manufacturing and with agreement manufacturing which are as follows:

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Without contract manufacturing:
Year 0 1 2 3 4 5 6 IRR
On discounted cash flow -1260000 168,466.08- 176,428.75 275,469.29 308,381.48 276,072.96 247,179.47 -3%
On normal cash flow -1260000 193,736.00- 233,327.02 418,954.35 539,361.13 555,281.32 571,741.14 12%
From the above table it is clearly stated that if the company will have negative value of
percentage as exemplified by -3% and 12% IRRs while before and after of the adjustment of the
discount factors IRR is calculated. Thus before investing in such a new project the management
have to think in advance about its expected revenue and expenditure on contract manufacturing
before coming to a conclusion (Ortaset al. 2015). As it will leads to the loss of the new project
which would reflects in its expenditures and revenues.
With contract manufacturing:
Year 0 1 2 3 4 5 6 IRR
On discounted cash flow 1,260,000.00- 16,055.66 303,302.10 405,000.64 423,270.16 377,974.22 337,561.46 11%
On normal cash flow 1,260,000.00- 18,464.00 401,117.02 615,955.35 740,302.15 760,241.16 780,800.18 27%
Here the IRR seems to be completely changed as it does not includes the expenditure and
revenues of the contract manufacturing as it includes the discounting factors before and after
adjustment in IRR of the new project, which is desirable thus the management would show its
interest and gets really convince to invest in such project (Bender 2013).

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Recommendation:
From the above description it is concluded due to the negative value of NPV without
taking into account the expenditures and revenue of the contract manufacturing which is
generally the part in the beginning of the project. As the new project on its own will not
becapable to recover the investment based on the proposal as the value will always be negative in
NPV. In order to supply the customers for the required amount of new medicine then the
machines if bought then it will only be used till up-to 50% of its capacity, thus this balance of
50%capacity of equipment will be idle and the management should use this percentage of
proficiency during its contract manufacturing procedure. While accumulating the expenditures
and revenues of the total money that are related with the contract manufacturer are being
provided by the manufacturer, management will have to invest in its new project for the
progression of the medicines, thus it shares a stability of 50% capacity of the equipment for
contracting manufacturing. The percentage of discounting factors before adjustment is 28%
while after the adjustment factor the rate are of 15% and 11% per annum are also required from
the opinion of AL.
The analysis of the result shows that the Net Present value of the option that includes
contract manufacturing has more NPV and higher IRR than the option without contract
manufacturing. Therefore, it is recommended that the business should select the option with the
contract manufacturing.

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Reference
Bender, C.M. and Orszag, S.A., 2013. Advanced mathematical methods for scientists and
engineers I: Asymptotic methods and perturbation theory. Springer Science & Business Media.
Brigham, E.F., 2014. Financial management theory and practice. Atlantic Publishers & Distri.
Grinblatt, M. and Titman, S., 2016. Financial markets & corporate strategy.
Petty, A.M., Isendahl, C., Brenkert-Smith, H., Goldstein, D.J., Rhemtulla, J.M., Rahman, S.A.
and Kumasi, T.C., 2015. Applying historical ecology to natural resource management
institutions: lessons from two case studies of landscape fire management. Global Environmental
Change, 31, pp.1-10.