Humanics Ltd is considering a proposed investment to manufacture medical equipment for a large-scale international research project in the area of immunology. A new study found linking particular genes with particular traits may be used to find drug targets and may ultimately lead to new therapies to treat different autoimmune diseases (e.g., rheumatoid arthritis, Graves’ disease, Addison’s disease, multiple sclerosis, type 1 diabetes etc.). Such diseases are gaining ground and already affect millions of people around the world, so the outcome of the intended research could have a large application for future immunotherapy. An initial feasibility study cost $125,000 and showed that the project requires an initial investment of $18 million, which includes $2 million of new working capital necessary for production. The annual free cash flow is estimated to be $5.5 million for 10 years, the envisioned length of the research study at which time working capital will be recovered. The management estimates the cost of capital for a project of this risk level to be 8.5%. The corporate tax rate is 28%. Should the project be accepted? Why or why not?
Humanics Ltd is considering a proposed investment to manufacture medical equipment for a large-scale international research project in the area of immunology. A new study found linking particular genes with particular traits may be used to find drug targets and may ultimately lead to new therapies to treat different autoimmune diseases (e.g., rheumatoid arthritis, Graves’ disease, Addison’s disease, multiple sclerosis, type 1 diabetes etc.). Such diseases are gaining ground and already affect millions of people around the world, so the outcome of the intended research could have a large application for future immunotherapy.
An initial feasibility study cost $125,000 and showed that the project requires an initial investment of $18 million, which includes $2 million of new
Should the project be accepted? Why or why not?
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