Best Biotechnology Corporation (BBC) has a new potential drug developed by their research group that they are considering moving from the lab into production. The available information and an Income Statement is shown below. Production and sales are to start in year 1.
All new working capital will be put in place during year 1 and will continue past the proposal time frame (e.g. It should not be considered as going to zero in the last year)
Salvage value is not to be considered.
IF BBC evaluates proposals using a discounted payback period approach where projects of this size have a payback criteria of 4 years, should the product be put into production based on this data? Show all calculations.
All dollar values are in millions of dollars.
Year 0 1 2 3 4 5
Sales Revenue Forecast $60.0 $90.0 $135.0 $202.5 $303.8
Past research costs $100
Facilities Investment $80
Depreciation on new facility 5 years straight line
Cost of Goods Sold (COGS) 25% of revenues
Start up costs $10 Expensed in first year
Marketing $20 annually
Management $30 annually
Inventory 25% of revenues
Accounts Receivable 30% of revenues
Accounts Payable 20% of COGS
Tax Rate 25%