Novogen Limited has two options to partner with a pharmaceutical firm to manufacture and distribute a life saving cancer preventative drug.
Option 1: Sigma Healthcare
This firm has agreed to buy back the manufacturing equipment used to produce the goods at a value of $80,000 once the 6 year contract is complete.
Option 2: Sonofi
This firm has agreed to purchase the manufacturing equipment used to produce the goods at a value of $50,000 once the contract of 6 years is complete.
| Sigma Healthcare | Sonofi | |
| Original Cost | -$250,000 | -$275,000 |
| Estimated Useful Life | 6 years | 6 years |
| Residual Value | $80,000 | $50,000 |
| Estimated Future Cash Flows | ||
| 31 December 2018 (time period = 1 year) | -$50,000 | -$80,000 |
| 31 December 2019 (time period = 2 years) | $100,000 | -$40,000 |
| 31 December 2020 (time period = 3 years) | $120,000 | $80,000 |
| 31 December 2021 (time period = 4 years) | $150,000 | $100,000 |
| 31 December 2022 (time period = 5 years) | $150,000 | $180,000 |
| 31 December 2023 (time period = 6 years) | $110,000 | $150,000 |
After calculating the data and analysing it, the best option would be for Novogen to go with Option 1. The net present value (NPV) is a healthy figure and the internal rate of return (IRR) is above the discounted cash rate of 10%. The payback period for the project is 3 years and 8 months which is also within Novogen’s useful life limit of 6 years.
The calculations for Option 2 had a negative figure for the net present value (NPV) and the internal rate of return (IRR) was below the discounted cash rate of 10%. Even though the payback period was within the time frame of 6 years, due to the NPV and IRR calculations this is not a viable option for Novogen.
https://drive.google.com/open?id=13VzzDeYLxur2Coxqov797b3g8HNlDqNE
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