At present, the market for MRI monitors is roughly 1,100-1,200 devices per year. It is growing at 6%-8% annually, and the company believes that it will continue growing at this rate for at least the next decade. Iradimed plans to sell its new monitor for $50,000, and believes that it can take at least 30% share of the market in the first two years of production. It expects to book its first sales 1 year from now if regulatory approvals come through as expected. Product development costs have totaled over $5m thus far, and the company expects to incur another $5m in costs this year, as it prepares for mass production. It will also need to invest $1m in inventory before it begins production, and expects working capital to be approximately 20% of revenues in the future. The variable cost of goods sold is expected to be $10,000 per unit, and the company expects to pay its sales force 25% of the revenues that they generate. They do NOT expect to incur any additional depreciation, as the machinery required to produce this product is already in place, or expect to generate any incremental fixed costs. Their average tax rate is 35%. The sales life of this product is expected to be 10 years, although there is a risk that it might be considerably shorter if Philips comes out with a competing model.
Iradimed appreciates the risk of trying to disrupt a single-supplier market (even for a product that its CEO designed), and feels that it’s appropriate to use a discount rate of 20% to evaluate this investment.
Build a model for this project using the assumptions given, and calculate the NPV, IRR, and payback period for this investment. Does the investment seem worth pursuing, based on these numbers?
The company would also like to know what its IRR will be if it can only reinvest the cash from this project at a 10% return; calculate a Modified IRR and comment on whether it changes your assessment.
Management would also like you to stress test a few assumptions:
What if the company only succeeds in taking 10% market share?
What if the company is able to take 50% market share?
What if regulatory approval is delayed by 1 year?
(This is not unrealistic; they’ve had problems with FDA delays in the past.)
What if the sales life of the product is only 5 years?
(This could very plausibly happen if Philips comes out with a redesign.)
What is the sensitivity of your NPV calculation to this product’s expected market share, and what is the lowest level of market share at which this product will meet management’s required return?
Write up your analysis: begin with a clear and concise recommendation on whether management should pursue this project, and explain how you arrived at that conclusion. This document is intended to help management make a decision, so make sure you include enough detail to allow management to follow your logic.
Your write-up should be no more than 3 pages plus at most 2 pages of supporting figures, and you must turn in your Excel (or Google Sheets) file with your assignment.