Orchid Biotech Company is evaluating several different development projects for
ID: 2783571 • Letter: O
Question
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 NumberInitial Capital Number of Research NPV (S) 10.1 19.0 22.0 25.0 60.2 Scientists 10 20 30 12 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?Explanation / Answer
a.
Net present value (NPV) is the difference between present value of cash inflows and initial investments.
Higher NPVs are always desired and preferred than lower NPVs.
Since total budget is $60 million, every higher NPV should be preferred till it reaches the maximum budget.
The highest NPV is $60.2 million and it has capital of $30 million for (V); the next highest NPV is $25 million, whose capital is $20 million for (IV). This means ($30 + $20 =) $50 million capital has gone; the capital remaining is ($60 - $50 =) $10 million, which could be absorbed through (I).
Answer: 1st priority is (V), 2nd priority is (IV), and 3rd priority is (I).
b.
The aggregate of highest NPVs should be considered here with the limitation of 12 scientists.
From the project (I) to (IV) the number of scientists are (2 + 3 + 4 + 3 =) 12, whose aggregate NPV is (10.1 + 19.0 + 22.0 + 25.0 =) $76.10 million; compare to this the sole project (V), requiring 12 scientists, having lower NPV ($60.2 million). Therefore, projects (I) to (IV) should be prioritized.
Answer: 1st priority is (IV), 2nd priority is (III), 3rd priority is (II), and 4th priority is (I).
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