Assumptions

The report deals with detailed analysis of the two projects that have been proposed to be undertaken by the company i.e. T-REC and P-REC on various parameters. The project has been conducted to understand whether to undertake the project, if yes, which project should be undertaken and then evaluation of such project on the qualitative parameters.

Before analysing the findings made in Appendix attached to the document, it shall be important to understand assumptions which are undertaken to understand the results better:

• Expenditure incurred towards training expense of human resource is a capital expenditure and the same is not depreciable. Further, no tax benefit is available on same;
• The duration of project is 8 years;
• Renovation cost is depreciable and has been depreciated over 8 years
• The asset has been sold at the end of 8 years;
• Loss on sale and corresponding tax benefit on the same has been considered  for analysis purpose;
• Working capital has been realised at the end of the project;
• R&D expenditure has been considered as sunk cost and not tax deductible.

On the basis of analysis have been conducted based on 4 parameters, the information n the same has been detailed here-in-below:

• Discounted Payback period: Under the said tool of capital budgeting, the period under which the initial cash outflow shall be realised is taken into consideration. Further, the method pay importance to time value of money and discounting to cash flows realised over the period is carried to ascertain the present value of the cash flows.

In the case of P-REC, cash flows have been discounted at 18% and 24% to understand the discounted payback period of the project. Accordingly, the discounted payback period of the project stands at 5.25 years and 6.43 years respectively which is greater than 5 years. Further, a brief snapshot of the computation is provided here-in-below:

Sl NO Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Terminal Value
1	Operating Cash flow before Tax	-2890000	748060	748060	748060	748060	1336060	1336060	1336060	1336060	310000
2	Tax		-224418	-224418	-224418	-224418	-400818	-400818	-400818	-400818	27600
3	Depreciation		306000	306000	306000	306000	306000	306000	306000	306000
4	Net Operating Cash flow	-2890000	829642	829642	829642	829642	1241242	1241242	1241242	1241242	337600
5	Discounting Factor @18%	1	0.847458	0.718184	0.608631	0.515789	0.437109	0.370432	0.313925	0.266038	0.266038164
6	Discounted Cash Flow	-2890000	703086.4	595836	504945.7	427920.1	542558.3	459795.2	389656.9	330217.7	89814.48408
7	Net Present Value	1153831
8	Cumulative	-2890000	-2186914	-1591078	-1086132	-658212	-115653	344141.8	733798.7	1064016	1153830.921
9	Discounted Pay back period							5.251532
10	Discounting Factor @24%	1	0.806452	0.650364	0.524487	0.422974	0.341108	0.275087	0.221844	0.178907	0.178906664
11	Cumulative	-2890000	-2220934	-1681364	-1246228	-895311	-471914	-130464	144898	366964.4	427363.3353
12	Discounted Pay back period								6.473792

The project is not feasible based on the requirement of the organisation to have discounted payback period less than 5 yeats

• Net Present Value: The second tool used for analysing P –REC is Net Present Value which is used to understand the net excess cash flow from the project by reducing outflow from inflow. This method recognise the importance of time value of money. Further, positive NPV indicates that the project should be accepted.(The Pennsylvania State Universit, 2018) The formula that is used for computation is detailed here-in-below:

Net Present Value = Present value of Inflows – Present Value of Out flows.

In the case of P-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the net present value of the project stands at $11,53,831/- and $4,27,363/- respectively. The snapshot of the computation has been presented here-in-below:

Year	Cash flows @18%	Cash flows @24%
0	-2890000	-2890000
1	703086	669066
2	595836	539569
3	504946	435137
4	427920	350917
5	542558	423397
6	459795	341449
7	389657	275362
8	420032	282465
Total	1153831	427363

The project is feasible as it has positive net present value at both 18% and 24% discounting rate.

• Internal Rate of Return: This is a capital Budgeting tool undertaken to ascertain the rate of return from the project undertaken. The method involves ascertaining the rate of discount at which the outflow of the project is equal to inflow.(InvestingAnswers, Inc, 2018)

In case of  P-REC, the internal rate of return stands at 24%, a brief snapshot of the same has been detailed here-in-below:

Year	Cash Flows
0	-2890000
1	829642
2	829642
3	829642
4	829642
5	1241242
6	1241242
7	1241242
8	1473242
IRR	28%

Since, project IRR is greater than 24% , project is feasible

• Profitability Index: The fourth tool used for analysis is profitability index which is computed on the basis of Present Value of inflow/ present value of outflow.(PEAVLER, 2018

In the case of P-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.399 and 1.148 respectively.

Since PI is greater than 1 at both discount rates i.e. 18% and 24% project shall be accepted

Before analysing the findings made in Appendix attached to the document, it shall be important to understand assumptions which are undertaken to understand the results better:

• Expenditure incurred towards training expense of human resource is a capital expenditure and the same is not depreciable. Further, no tax benefit is available on same;
• The duration of project is 8 years;
• Renovation cost is depreciable and has been depreciated over 8 years
• The asset has been sold at the end of 8 years;
• Loss on sale and corresponding tax benefit on the same has been considered  for analysis purpose;
• Working capital has been realised at the end of the project;
• No other cost has been considered for analysis;
• R&D expenditure has been considered as sunk cost and not tax deductible.

On the basis of analysis have been conducted based on 4 parameters, the information n the same has been detailed here-in-below:

• Discounted Payback Period:

In the case of T-REC, cash flows have been discounted at 18% and 24% to understand the discounted payback period of the project. Accordingly, the discounted payback period of the project stands at 7.024 years and unrealisable respectively which is greater than 5 years. (Payback Period & Discounted Payback Period | Formula | Example, 2018)

The project is not feasible at 24% discounting rate.

• Net Present Value:

In the case of T-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the net present value of the project stands at $2,20,794/- and -$2,34,538/- respectively.

The project is not feasible at 24% discounting rate.

• Internal Rate of return of the project is 22% for T-REC.
• Profitability Index

In the case of T-REC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.076 and .9188 respectively.

The project is not feasible at 24% discounting rate.

The qualitative factors that must be taken into consideration for analysing the project has been detailed here-in-below:

• The project proposed to be undertaken i.e P-REC is risky as the same might cause long term hazard to the company on account of not being fully clinically tested. The impact of the same may adversely impact the cash flows stated above;
• There might be litigation and dispute on account of undertaking the project and the same shall hamper the future prospect of the company;
• Since the Pharmaceutical Sector is prone to litigation and bans risk of such kind may in the long result in closure of the company;
• Further, one should consider the competitor action and the response of them and the above computation might not hold true if any competitor launches similar product with better results;
• For T-REC, it is clinically safe and tested but the same is not feasible @24% discounting rate. However, it is less prone to litigation and the above result shall hold good unless any drastic change take place in economy or on account of any major innovation;

The company should carry out the production of T-Rec if the cost of funding is less than 18% and shall launch P-Rec post clinical testing and understanding the side impact, even though the analysis carried out above is in favour of P-REC as the said situation might not hold good in case of any litigation and dispute which shall impact the continuity of business.

The detail comparison has been presented here-in-below:

Sl No	Particular	P-REC	T-REC
1	Discounted Pay Back period @18%	5.251532	7.024696201
2	Discounted Pay Back period @24%	6.473792	Never Paid off
3	Net Present Value @18%	1153831	220793.9465
4	Net Present Value @24%	427363.3	-234538.2196
5	Internal Rate of Return	28%	22%
6	Profitability Index @18%	1.40	1.08
7	Profitability Index @24%	1.15	0.92

On the basis of quantitative analysis, project P-REC shall be accepted but looking at qualitative aspect company should not go for P-REC as it shall tarnish the image of the company in the long run.

Conclusion

On the basis of above analysis, T-REC shall be accepted further it shall be pertinent to note that P-REC is not clinically proven and same shall be tested to be launch on a future date and the company should proceed with T-REC.

References:

InvestingAnswers, Inc. (2018). Internal Rate of Return (IRR). Retrieved October 1, 2018, from investinganswers.com: https://investinganswers.com/financial-dictionary/investing/internal-rate-return-irr-2130

Payback Period & Discounted Payback Period | Formula | Example. (2018). Retrieved October 1, 2018, from www.wallstreetmojo.com: https://www.wallstreetmojo.com/payback-period-discounted-payback-period/

PEAVLER, R. (2018, july 23). The Profitability Index. Retrieved October 1, 2018, from www.thebalancesmb.com: https://www.thebalancesmb.com/the-profitability-index-392917

The Pennsylvania State Universit. (2018). Net Present Value, Benefit Cost Ratio, and Present Value Ratio for project assessment. Retrieved October 1, 2018, from www.e-education.psu.edu: https://www.e-education.psu.edu/eme460/node/608