Super Writting

Answer:

1)

According to the scenario 2, there is 30% possibility that the company would face tough competition from new competitors in the market. Therefore, the possibility that the Pharmaceutical Company would run at full capacity is 70%.

If the Pharmaceutical Company would run at full capacity, the detail is as follow:

Year 0: $400,000 capital expenditure cash outflow

Year 1: $700,000 business value cash inflow

$400,000*15%=$60,000 interest repayment cash outflow

NPV=-400000+7000001+15%-400000×15%1+15%

= 156521.65

If the company would face tough competition from new competitors in the market, the detail is as follow:

Year 0: $400,000 capital expenditure cash outflow

Year 1: $340, 000 business value cash inflow

$400,000*15%=$60,000 interest repayment cash outflow

NPV=-400000+3400001+15%-400000×15%1+15%

= -156521.74

According to the two scenarios and their possibilities, this project’s NPV is :

NPV=70%×156521.65+30%×(-156521.74)

=109565.16-46956.52

=$62608.64

As the NPV is positive, the firm should invest in this project.

2)

Under the Pessimistic situation, the detail is as follow:

Variables | Pessimistic |

Interest Rate | 20.00% |

Initial investment | $500,000 |

Probablity of failure | 50.00% |

Business worth(Full capacity) | $600,000 |

Business worth(tough competition) | $240,000 |

If the Pharmaceutical Company would run at full capacity, the detail is as follow:

Year 0: $500,000 capital expenditure cash outflow

Year 1: $600,000...