Billion Dollars - Potential Competitors - Cost Of Production - Research Assignment Help

Assessment Task:

Billion Dollars - Potential Competitors - Cost Of Production - Research Assignment Help  

Nucleon is trying to determine whether to produce a new drug that makes pigs healthier.  The product will be sold in years one to five.  The following information is relevant:

•A fixed cost is incurred on January 1 of year 1 and will be between 750 million dollars and 3.75 billion dollars.  There is a 20% chance the fixed cost will be less than or equal to 1.5 billion dollars, a 60% chance that it will be less than or equal to 2.25 billion dollars, and a 90% chance it will be less than or equal to 3 billion dollars.  The fixed cost is depreciated on a straight line basis during years one to five.
•    The tax rate is 40%.  Assume that the before tax profit can be either positive or negative.  The point of view reflects that this company has overall positive cash flows, even though the cash flow on this project can be negative. Therefore, the effect of a negative tax is that the company's overall tax bill is reduced by having a loss on this project.
•The weighted average cost of capital is 15%.  This is the rate that Nucleon uses for discounting cash flows.
•The market size in year one is 10 million pigs.
•During each of years two through five, the market size will grow at the same rate.  This growth rate is assumed to follow a triangular distribution with best case 15%, most likely case 6% and worst case 1%.
•The selling price is always $100 per unit, and the cost of production is always $16 per unit.
•In year one, the average number of units of the drug sold for each pig will be between 1 and 2, with 1.3 and 1.7being equally likely, and 1.5 being twice as likely as 1.3.
•There are three potential competitors.  During each of years one to five, a competitor who has not entered the market has a 60% chance of entering the market.
•The year after a competitor enters the market, the average units sold per pig of the Nucleon drug drops by 20% for each competitor entering.  For example, suppose the sales per pig are 1.5 units in year one.  If two competitors enter the market in year 1, Nucleon sales per pig drop to .9 (i.e. 1.5*(1-0.2*2)) in year 2 and stay there until another competitor enters that market.
•All cash flows other than the fixed cost on January 1 of year 1 are incurred midyear.

a)Use simulation with @Risk and at least 1000 iterations to model Nucleon’s situation.  Report the expected NPV of the free cash flows (discounted back to the start of year 1),the probability that the NPV is negative, and the VAR.  Construct a histogram of the NPV.  Based on the simulation output, would you go ahead with this project?  Explain why or why not.  Based on the simulation output, determine what the three key drivers of the project’s NPV are.

b)Suppose that Nucleon is concerned that the threat of new competition is higher than initially thought.  Specifically, they want you to reevaluate the model using values of 4 and 5 for the number of potential competitors.  Follow the same prompts as for part a.  

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