Following the outbreak of  the  Novel Coronavirus  (COVID  19),  CPC a  pharmaceutical company is considering introducing a new vaccine  unto  the  market to help fight the virus.  This  will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢ 5,500,000 to set  up  the  production  facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the  vaccine  could  be manufactured in a building owned by the firm and located in East Legon.  This  vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capitalinvestment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bondwith a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the   Finance  Director  has  estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on  Government of Ghana  traded Treasury bills  is  5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:   2020 Variable cost per unit of the product GH¢150 Selling price per unit GH¢350 Quantity 400,000units per annum   Again the following information should be taken note of: • Feasibility   studies  cost the company GH¢2,000,000 • Test marketing  expenses amounts  to GH¢1,000,000 • The research into the discovery of the vaccine costsGH¢5,000,000 • Variable cost will increase by 5% per annum • Selling price will increase by 10% per annum • Marketing expense will be 5% of sales revenue per year • Overhead cost will be fixed at GH¢6000,000 per year • The project will last for five (5) years (2021-2025)   • Charge depreciation using the straight-line method • Salvage value for equipment is GH¢2,000,000 • CPC falls within the 25% tax bracket • An initial  working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will  decline  to  zero  as  the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life • The introduction of this  new  vaccine  is  expected  to lead to 10,000 units  per annum drop in sales of vaccines for other types of corona virus by.  The  selling  price  per  unit  of existing products is GH¢100 while the variable cost is GH¢70.  This  has  no  tax implications for the newvaccine. • The project will be financed with debt and equity Required: b. Discuss three (3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production   of the vaccine.

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Following the outbreak of  the  Novel Coronavirus  (COVID  19),  CPC a  pharmaceutical company is considering introducing a new vaccine  unto  the  market to help fight the virus.  This  will require the injection of huge capital to the tune of GH¢40,000,000 for the purchase of the equipment for production. It will cost CPC an additional GH¢ 5,500,000 to set  up  the  production  facility and install that equipment for production. Mr. Smart, the CEO of CPC believes that the  vaccine  could  be manufactured in a building owned by the firm and located in East Legon.  This  vacant building and the land can be sold for GH¢ 1,500,000 after taxes. CPC will finance the production of the vaccine (including initial working capitalinvestment) by issuing 2000,000 new common stocks at GH¢ 20 per share from its existing shareholders. A total of GH¢ 15,000,000 is expected to be raised from the rights issue. It expects to finance the remaining from the issue of a 5-year bondwith a before-tax yield to maturity (YTM) of 12%. Mr. Qwesi, the   Finance  Director  has  estimated the beta of the project to be 2.5 and the average return for stocks traded on the Ghana Stock Exchange to be 10% while the rate on  Government of Ghana  traded Treasury bills  is  5%. The successful production of the vaccine will generate additional cash flows for CPC. The Production and Marketing department has presented the information in the table below:

 

2020

Variable cost per unit of the product

GH¢150

Selling price per unit

GH¢350

Quantity

400,000units per annum

 

Again the following information should be taken note of:

• Feasibility   studies  cost the company GH¢2,000,000
• Test marketing  expenses amounts  to GH¢1,000,000
• The research into the discovery of the vaccine costsGH¢5,000,000
• Variable cost will increase by 5% per annum
• Selling price will increase by 10% per annum
• Marketing expense will be 5% of sales revenue per year
Overhead cost will be fixed at GH¢6000,000 per year
• The project will last for five (5) years (2021-2025)
 
• Charge depreciation using the straight-line method
• Salvage value for equipment is GH¢2,000,000
• CPC falls within the 25% tax bracket
• An initial  working capital investment of GH¢10,000,000will be made. Subsequently, net working capital at the end of each year will be equal to 10 percent of sales for that year. In the final year of the project, net working capital will  decline  to  zero  as  the project is wound down. In other words, the investment in working capital is to be completely recovered by the end of the project’s life
• The introduction of this  new  vaccine  is  expected  to lead to 10,000 units  per annum drop in sales of vaccines for other types of corona virus by.  The  selling  price  per  unit  of existing products is GH¢100 while the variable cost is GH¢70.  This  has  no  tax implications for the newvaccine.
• The project will be financed with debt and equity

Required:

b. Discuss three (3) qualitative factors that the Management of CPC might have to consider and how these factors are expected to influence the decision of Management with regards to the production   of the vaccine.

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