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The report deals with a detailed analysis of the two projects that have been proposed to be undertaken by the company i.e. TREC and PREC on various parameters. The project has been conducted to understand whether to undertake the project, if yes, which project should be undertaken and then evaluation of such project on the qualitative parameters.
Before analysing the findings made in Appendix attached to the document, it shall be important to understand assumptions which are undertaken to understand the results better:
Expenditure incurred towards training expense of human resource management is a capital expenditure and the same is not depreciable. Further, no tax benefit is available on same;
1. The duration of project is 8 years;
2. Renovation cost is depreciable and has been depreciated over 8 years
3. The asset has been sold at the end of 8 years;
4. Loss on sale and corresponding tax benefit on the same has been considered for analysis purpose;
5. Working capital has been realised at the end of the project;
6. R&D expenditure has been considered as sunk cost and not tax deductible.
On the basis of analysis have been conducted based on 4 parameters, the information n the same has been detailed hereinbelow:
1. Discounted Payback period: Under the said tool of capital budgeting, the period under which the initial cash outflow shall be realised is taken into consideration. Further, the method pay importance to time value of money and discounting to cash flows realised over the period is carried to ascertain the present value of the cash flows.
In the case of PREC, cash flows have been discounted at 18% and 24% to understand the discounted payback period of the project. Accordingly, the discounted payback period of the project stands at 5.25 years and 6.43 years respectively which is greater than 5 years. Further, a brief snapshot of the computation is provided hereinbelow:
Sl NO 
Particulars 
Year 0 
Year 1 
Year 2 
Year 3 
Year 4 
Year 5 
Year 6 
Year 7 
Year 8 
Terminal Value 
1 
Operating Cash flow before Tax 
2890000 
748060 
748060 
748060 
748060 
1336060 
1336060 
1336060 
1336060 
310000 
2 
Tax 

224418 
224418 
224418 
224418 
400818 
400818 
400818 
400818 
27600 
3 
Depreciation 

306000 
306000 
306000 
306000 
306000 
306000 
306000 
306000 

4 
Net Operating Cash flow 
2890000 
829642 
829642 
829642 
829642 
1241242 
1241242 
1241242 
1241242 
337600 
5 
Discounting Factor @18% 
1 
0.847458 
0.718184 
0.608631 
0.515789 
0.437109 
0.370432 
0.313925 
0.266038 
0.266038164 
6 
Discounted Cash Flow 
2890000 
703086.4 
595836 
504945.7 
427920.1 
542558.3 
459795.2 
389656.9 
330217.7 
89814.48408 
7 
Net Present Value 
1153831 









8 
Cumulative 
2890000 
2186914 
1591078 
1086132 
658212 
115653 
344141.8 
733798.7 
1064016 
1153830.921 
9 
Discounted Pay back period 






5.251532 



10 
Discounting Factor @24% 
1 
0.806452 
0.650364 
0.524487 
0.422974 
0.341108 
0.275087 
0.221844 
0.178907 
0.178906664 
11 
Cumulative 
2890000 
2220934 
1681364 
1246228 
895311 
471914 
130464 
144898 
366964.4 
427363.3353 
12 
Discounted Pay back period 







6.473792 


The project is not feasible based on the requirement of the organisation to have discounted payback period less than 5 yeats.
2. Net Present Value: The second tool used for analysing P –REC is Net Present Value which is used to understand the net excess cash flow from the project by reducing outflow from inflow. This method recognise the importance of time value of money. Further, positive NPV indicates that the project should be accepted.[ CITATION The18 \l 16393 ] The formula that is used for computation is detailed hereinbelow:
Net Present Value = Present value of Inflows – Present Value of Out flows.
In the case of PREC discounting has been carried at two rates i.e. 18% and 24% and accordingly the net present value of the project stands at $11,53,831/ and $4,27,363/ respectively. The snapshot of the computation has been presented hereinbelow
Year 
Cash flows @18% 
Cash flows @24% 
0 
2890000 
2890000 
1 
703086 
669066 
2 
595836 
539569 
3 
504946 
435137 
4 
427920 
350917 
5 
542558 
423397 
6 
459795 
341449 
7 
389657 
275362 
8 
420032 
282465 
Total 
1153831 
427363 
The project is feasible as it has a positive net present value at both 18% and 24% discounting rate.
3. Internal Rate of Return: This is a capital Budgeting tool undertaken to ascertain the rate of return from the project undertaken. The method involves ascertaining the rate of discount at which the outflow of the project is equal to inflow.[ CITATION Inv18 \l 16393 ]
In case of PREC, the internal rate of return stands at 24%, a brief snapshot of the same has been detailed hereinbelow:
Year 
Cash Flows 
0 
2890000 
1 
829642 
2 
829642 
3 
829642 
4 
829642 
5 
1241242 
6 
1241242 
7 
1241242 
8 
1473242 
IRR 
28% 
Since, project IRR is greater than 24 % , project is feasible
3. Profitability Index: The fourth tool used for analysis is profitability index which is computed on the basis of Present Value of inflow/ present value of outflow.[ CITATION ROS18 \l 16393 ]
In the case of PREC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.399 and 1.148 respectively.
Since PI is greater than 1 at both discount rates i.e. 18% and 24% project shall be accepted
Expenditure incurred towards training expense of human resource is a capital expenditure and the same is not depreciable. Further, no tax benefit is available on same;
1. The duration of the project is 8 years;
2. Renovation cost is depreciable and has been depreciated over 8 years
3. The asset has been sold at the end of 8 years;
4. Loss on sale and corresponding tax benefit on the same has been considered for analysis purpose;
5. Working capital has been realised at the end of the project;
6. No other cost has been considered for analysis;
7. R&D expenditure has been considered as sunk cost and not tax deductible.
On the basis of analysis have been conducted based on 4 parameters, the information n the same has been detailed hereinbelow:
In the case of TREC, cash flows have been discounted at 18% and 24% to understand the discounted payback period of the project. Accordingly, the discounted payback period of the project stands at 7.024 years and unrealisable respectively which is greater than 5 years. [ CITATION Pay18 \l 16393 ]
The project is not feasible at 24% discounting rate.
In the case of TREC discounting has been carried at two rates i.e. 18% and 24% and accordingly the net present value of the project stands at $2,20,794/ and $2,34,538/ respectively.
The project is not feasible at 24% discounting rate.
Internal Rate of return of the project is 22% for TREC.
In the case of TREC discounting has been carried at two rates i.e. 18% and 24% and accordingly the PI of the project stands at 1.076 and .9188 respectively.
The project is not feasible at 24% discounting rate.
The qualitative factors that must be taken into consideration for analysing the project has been detailed hereinbelow:
The project proposed to be undertaken i.e PREC is risky as the same might cause long term hazard to the company on account of not being fully clinically tested. The impact of the same may adversely impact the cash flows stated above;
There might be litigation and dispute on account of undertaking the project and the same shall hamper the future prospect of the company;
Since the Pharmaceutical Sector is prone to litigation and bans risk of such kind may in the long result in closure of the company;
Further, one should consider the competitor action and the response of them and the above computation might not hold true if any competitor launches similar product with better results;
For TREC, it is clinically safe and tested but the same is not feasible @24% discounting rate. However, it is less prone to litigation and the above result shall hold good unless any drastic change take place in economy or on account of any major innovation;
The company should carry out the production of TRec if the cost of funding is less than 18% and shall launch PRec post clinical testing and understanding the side impact, even though the analysis carried out above is in favour of PREC as the said situation might not hold good in case of any litigation and dispute which shall impact the continuity of business.
The detail comparison has been presented hereinbelow:
Sl No 
Particular 
PREC 
TREC 
1 
Discounted Pay Back period @18% 
5.251532 
7.024696201 
2 
Discounted Pay Back period @24% 
6.473792 
Never Paid off 
3 
Net Present Value @18% 
1153831 
220793.9465 
4 
Net Present Value @24% 
427363.3 
234538.2196 
5 
Internal Rate of Return 
28% 
22% 
6 
Profitability Index @18% 
1.40 
1.08 
7 
Profitability Index @24% 
1.15 
0.92 
On the basis of quantitative analysis, project PREC shall be accepted but looking at qualitative aspect company should not go for PREC as it shall tarnish the image of the company in the long run.
On the basis of above analysis, TREC shall be accepted
1. InvestingAnswers, Inc. (2018). Internal Rate of Return (IRR). Retrieved October 1, 2018, from investinganswers.com: https://investinganswers.com/financialdictionary/investing/internalratereturnirr2130
2. Payback Period & Discounted Payback Period  Formula  Example. (2018). Retrieved October 1, 2018, from www.wallstreetmojo.com: https://www.wallstreetmojo.com/paybackperioddiscountedpaybackperiod/
3. PEAVLER, R. (2018, july 23). The Profitability Index. Retrieved October 1, 2018, from www.thebalancesmb.com: https://www.thebalancesmb.com/theprofitabilityindex392917
4. The Pennsylvania State Universit. (2018). Net Present Value, Employee Benefit Cost Ratio, and Present Value Ratio for project assessment. Retrieved October 1, 2018, from www.eeducation.psu.edu: https://www.eeducation.psu.edu/eme460/node/608