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FINC2012 Assignment
ALLVAX PTY LTD ANTICOV FLOW and ALT ZENECA PROJECTS Due 5pm, 24th September, 2021 (Upper word limit: 2,000 words) This is an individual assignment. This means that you are required to write your own answers to the questions, the Turnitin system checks for copied work. Hilary Maskona, the CEO of AllVax, met with her advisor, Vincent Purell, to review a capital-expenditure proposal on a production plant to produce COVID-19 vaccines using mRNA technology. The proposal, named AntiCov Flow project, calls for an expenditure of $9 million spread over three years to convert an existing production plant from batch to continuous-flow technology and to install sophisticated state-of-the-art process controls throughout the plant. This project is only feasible with a continuous source of cationic lipids from a chemical synthesis process conducted in a specialised manufacturing facility. The proposal suggests AllVax to purchase this type of manufacturing facility from a supplier (rather than sourcing the cationic lipids from two separate suppliers). AllVax has an option to exclusively purchase the cationic lipids facility from a supplier for $4 million (included in the proposed $9 million expenditure). The option was purchased several years earlier. Vincent advises the CEO that a comparable cationic lipids manufacturing facility can be sold today for $7 million in an auction. Vincent also forecasts that at the end of the project, the value of the cationic lipids manufacturing facility will be $30 million. This option will expire in 5 months. The proposal will require the plant to be shut down for 5 months in the 1st year, 4 months in the 2nd year, and 3 months in the 3rd year. Vincent believes the loss will not be permanent. The benefits include an increase of 6% in new output gain on old output [new output = old output x (1+6%)] and
an increase of 3% in gross margin on old gross margin of 11.5% (new gross margin = old gross margin + gross margin increase).
The increased outputs will necessitate additional work-in-process inventory in value to 3% of the
increased cost of goods. Vincent suggests that new assets will be fully depreciated on a straight—line basis over the life of the project.
It is AllVax’s policy to record depreciation expenses in the same year as expenditures. Vincent also estimates that overhead
costs are at 3.5% of the increased sales. Inflation is set at 0%. It is AllVax’s policy to evaluate projects based on four criteria:
(1) net present value, (2) internal rate of return, (3) payback, and (4) growth in earnings per share. Your task is to examine
Vincent’s analysis and make adjustments where necessary. 1. Provide a quantitative analysis of the AntiCov Flow project by
completing the AntiCov Flow spreadsheet provided. (7 marks) 2. Provide your estimates of each of the following project selection methods: (1) Net Present Value (NPV)