Assignment:
Task 1 Ethics in Finance
Discuss the effects on National Australia Bank following the report from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (https://financialservices.royalcommission.gov.au/Pages/default.aspx). Ethical perspectives should be the focus for this essay.
Task 2 (a) Application in Capital Budgeting
Michael, the product development manager for Apex Pharmaceuticals (AP) joined the firm about 7 years ago. With a bachelor's degree in chemistry and an MBA from Peter Faber Business School, Michael has been fairly successful in his professional career. Prior to working at AP, Michael was responsible for the launching of three highly successful drugs at another mid-sized pharmaceutical company. It did not take long for the head-hunters to find him and shortly thereafter AP made him an offer that was too good to refuse. AP is a fairly large pharmaceutical company that has a number of patented drugs under its belt. With a number of the firm's patents expiring in the next three years, there has been some pressure to expand its production lines. Michael has been asked to make recommendations for new investment to the Board, specifically regarding a new drug recently developed by AP's Research Department.
The Vision Research division recently invented a new drug, nicknamed ClearView, for the cure of myopia, which has shown tremendous promise in the preliminary test. The project leader, Catherine, is very confident that this new drug could revolutionise the world of ophthalmology. Upon Michael's request, she also provides some standard cost estimates if the product is approved and launched early this year. Development costs: 20 million Testing costs: 10 million Initial Marketing costs: 12 million Initial outlay: 42 million The new drug is expected to be a block-buster, which will help to increase the company's market share and the sales are expected to be $18 million in the first year.
The sales revenue generated from this product alone is expected to grow at a rate of 9% pa in second, third, and fourth years and stay in line with inflation thereafter until its patent expires in 10 years. Required equipment costing $8 million is expected to have a salvage value of $200,000 after 10 years. Fixed costs are estimated to be $3.50 million per year while variable production costs are expected to be equal to 20% of sales revenue in each case. To get the project underway, additional inventory of $450,000 would be required. The company would also need to increase its accounts payable by $100,000 and its accounts receivable by $150,000. The weighted average cost of capital is calculated to be 11.5%. The current inflation of 1.5% pa is expected to remain stable over the next 15 years, and so is the company's tax rate of 30%.
Task 2 (a): You have been asked to advise the manager whether the proposal should be adopted using NPV and IRR analyses. In doing so, you need to present the following in Excel:
i. Relevant assumptions
ii. Treatment of depreciation
iii. Treatment of working capital
iv. Calculation of initial cash outlay, operating cashflows per year and terminal cashflows
v. Calculation of NPV and IRR
vi. Valid conclusion based on NPV and IRR analyses
Task 2 (b) Project Risk Analysis
You need to provide a sensitivity analysis and scenario analysis in Excel using the results in Task 1(a), an analysis which could be scrutinised and questioned by the relevant company committee. The sensitivity analysis and scenario analysis should be based on the following scenarios: Scenarios Sales Fixed Cost (FC) Pessimistic estimate 20% decrease in sales 20% Increase in FC Base case $18 million $3.50 million Optimistic estimate 20% Increase in sales 20% Decrease in FC Lodgement of assignments.