EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 7, Problem 34P
Orchid Biotech Company is evaluating several development projects for experimental drugs. Although the cash flows are difficult to
- a. Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects?
- b. Suppose in addition that Orchid currently has only 12 research scientists and does not anticipate being able to hire any more in the near future. How should Orchid prioritize these projects?
- c. If instead, Orchid had 15 research scientists available, explain why the profitability index ranking cannot be used to prioritize projects. Which projects should it choose now?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
不
Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the
cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital
requirements and NPVs for the projects: Given a wide variety of staffing needs, the company has also estimated
the number of research scientists required for each development project (all cost values are given in millions
of dollars).
a. Suppose that Orchid has a total capital budget of $60million. How should it prioritize these projects?
b. Suppose that Orchid currently has 12research scientists and does not anticipate being able to hire more in the near
future. How should Orchid prioritize these projects?
a. Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects?
The profitability index for Project I is
(Round to two decimal places.)
Data table
(Click on the following icon in order to copy its contents into a…
Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital requirements and
NPVs
for the projects. Given a wide variety of staffing needs, the company has also estimated the number of research scientists required for each development project (all cost values are given in millions of dollars).
Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult toforecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the projects:
Project Number
Initial Capital ($)
Number of Research Scientists
NPV ($)
I
10
2
10.1
II
15
3
19.0
III
15
4
22.0
IV
20
3
25.0
V
30
12
60.2
Given a wide variety of staffing needs, the company has also estimated the number of research scientists required for each development project (all cost values are given in millions of dollars).
Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects?
The profitability index for Project I is ___________________(Round to two decimal places.)
The profitability index for Project II is __________________________ (Round to two decimal places.)
The profitability index for…
Chapter 7 Solutions
EBK CORPORATE FINANCE
Ch. 7.1 - Explain the NPV rule for stand-alone projects.Ch. 7.1 - What does the difference between the cost of...Ch. 7.2 - Prob. 1CCCh. 7.2 - If the IRR rule and the NPV rule lead to different...Ch. 7.3 - Can the payback rule reject projects that have...Ch. 7.3 - Prob. 2CCCh. 7.4 - For mutually exclusive projects, explain why...Ch. 7.4 - What is the incremental RR and what are its...Ch. 7.5 - Prob. 1CCCh. 7.5 - Prob. 2CC
Ch. 7 - Your brother wants to borrow 10,000 from you. He...Ch. 7 - You are considering investing in a start-up...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Your firm is considering the launch of a new...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - FastTrack Bikes, Inc. is thinking of developing a...Ch. 7 - OpenSeas, Inc. is evaluating the purchase of a new...Ch. 7 - You are CEO of Rivet Networks, maker of ultra-high...Ch. 7 - You are considering an investment in a clothes...Ch. 7 - You have been offered a very long term investment...Ch. 7 - You are considering opening a new plant. The plant...Ch. 7 - Bill Clinton reportedly was paid 15 million to...Ch. 7 - Prob. 13PCh. 7 - Innovation Company is thinking about marketing a...Ch. 7 - You have 3 projects with the following cash flows:...Ch. 7 - You own a coal mining company and are considering...Ch. 7 - Prob. 17PCh. 7 - Prob. 18PCh. 7 - Prob. 19PCh. 7 - Prob. 20PCh. 7 - You are a real estate agent thinking of placing a...Ch. 7 - Prob. 22PCh. 7 - You are deciding between two mutually exclusive...Ch. 7 - You have just started your summer Internship, and...Ch. 7 - Prob. 25PCh. 7 - Prob. 26PCh. 7 - Prob. 27PCh. 7 - Prob. 28PCh. 7 - Prob. 29PCh. 7 - Prob. 30PCh. 7 - Prob. 31PCh. 7 - Prob. 32PCh. 7 - Prob. 33PCh. 7 - Orchid Biotech Company is evaluating several...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital requirements and NPVS for the projects. Given a wide variety of staffing needs, the company has also estimated the number of research scientists required for each development project. (All cost values are given in millions of dollars.) Project Number V xt pages Initial Capital Number of Research Scientists (S) 10 15 MAMA 15 20 30 a. Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects? b. Suppose that Orchid currently has 12 research scientists and does not anticipate being able to hire more in the near future How should Orchid prioritize these projects? Ask my instructor Search 2 3 4 3 12 a Suppose that Orchid has a total capital budget of $60 million. How should it prioritize these projects? The profitability…arrow_forwardNonearrow_forwardGina Ripley, president of Dearing Company, is considering the purchase of a computer-aided manufacturing system. The annual net cash benefits and savings associated with the system are described as follows: The system will cost 9,000,000 and last 10 years. The companys cost of capital is 12 percent. Required: 1. Calculate the payback period for the system. Assume that the company has a policy of only accepting projects with a payback of five years or less. Would the system be acquired? 2. Calculate the NPV and IRR for the project. Should the system be purchasedeven if it does not meet the payback criterion? 3. The project manager reviewed the projected cash flows and pointed out that two items had been missed. First, the system would have a salvage value, net of any tax effects, of 1,000,000 at the end of 10 years. Second, the increased quality and delivery performance would allow the company to increase its market share by 20 percent. This would produce an additional annual net benefit of 300,000. Recalculate the payback period, NPV, and IRR given this new information. (For the IRR computation, initially ignore salvage value.) Does the decision change? Suppose that the salvage value is only half what is projected. Does this make a difference in the outcome? Does salvage value have any real bearing on the companys decision?arrow_forward
- Consider the following project data. A marketing study that costs $200 will be conducted at t = 0. The best estimate now is that there is a 70 percent chance that the study will indicate potential and a 30 percent chance that it will not. If the study indicates potential, the firm will spend $500 at t = 1 to start production. If the firm starts production, the firm is confident that cash inflows will be $1,000 annually for two years (t=2 and 3). If the appropriate cost of capital is 10 percent, what is the project's expected NPV to the nearest dollar? A) $1,300 B) $923 C) $646 D) $586 E) $446arrow_forwardA financial analyst in Pitt’s Sock Company prepared a capital budgeting analysis. The analyst calculated an NPV of $150,000 for the project. You just realized that the initial cash flow related to buying new equipment had a typo. The analysis was based on a purchase price of $10,000; however, the actual cost should have been $100,000. Which of the following is correctarrow_forwardbased on information on the image attached, Calculate the initial investment required for the project and then Discuss the significance of each ratio in evaluating the project.arrow_forward
- Consider this case: Suppose Green Caterpillar Garden Supplies Inc. is evaluating a proposed capital budgeting project (project Alpha) that will require an initial investment of $550,000. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $350,000 Year 2 450,000 Year 3 500,000 Year 4 400,000 Green Caterpillar Garden Supplies Inc.’s weighted average cost of capital is 9%, and project Alpha has the same risk as the firm’s average project. Based on the cash flows, what is project Alpha’s net present value (NPV)? (Note: Do not round your intermediate calculations.) $1,219,319 $1,269,319 $1,319,319 $819,319arrow_forwardThe internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,400,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 7%, and project Delta has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $400,000 Year 4 $425,000 Q1. Which of the following is the correct calculation of project Delta’s…arrow_forwardShrieves Casting Company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by Sidney Johnson, a recently graduated MBA. The production line would be set up in unused space in the main plant. The machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and Shrieves has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,000 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line,…arrow_forward
- The internal rate of return (IRR) refers to the compound annual rate of return that a project generates based on its up-front cost and subsequent cash flows. Consider this case: Blue Llama Mining Company is evaluating a proposed capital budgeting project (project Delta) that will require an initial investment of $1,500,000. Blue Llama Mining Company has been basing capital budgeting decisions on a project’s NPV; however, its new CFO wants to start using the IRR method for capital budgeting decisions. The CFO says that the IRR is a better method because percentages and returns are easier to understand and to compare to required returns. Blue Llama Mining Company’s WACC is 8%, and project Delta has the same risk as the firm’s average project. The project is expected to generate the following net cash flows: Year Cash Flow Year 1 $300,000 Year 2 $425,000 Year 3 $475,000 Year 4 $450,000 Which of the following is the correct calculation of project Delta’s IRR?…arrow_forwardSiegel Industries is considering two capital budgeting projects. Project A requires an initial investment of $48,000. It is expected to produce net annual cash flows of $8,000. Project B requires an initial investment of $75,000 and is expected to produce net annual cash flows of $12,000. Using the cash payback technique to evaluate the two projects, Siegel should accept: A. Project A because it has a shorter cash payback period. B. Project B because it produces a larger net annual cash flow. C. Project B because it has a shorter cash payback period. D. Project A because it requires a smaller initial investment.arrow_forwardBrunko Hospitality Investment Associates have been approached to evaluate a set of capital budgeting projects. The expected net cash flows along with the initial outlays are represented in the data table below: Year Project 1 Project 2 0 -$250,000 -$250,000 1 $0 $120,000 2 $0 $120,000 3 $0 $120,000 4 $0 $120,000 5 $900,000 $120,000 This firm would like to evaluate the set of capital budgeting projects based on the NPV and IRR. If the minimum required rate of return is 13.00% for both of the projects, which project seems like a better investment to undertake?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Capital Budgeting Introduction & Calculations Step-by-Step -PV, FV, NPV, IRR, Payback, Simple R of R; Author: Accounting Step by Step;https://www.youtube.com/watch?v=hyBw-NnAkHY;License: Standard Youtube License