Assignment 2020 S2
Bionomics Ltd. is a clinical stage biopharmaceutical company, which discovers and develops
therapeutics for cancer and diseases of the central nervous system. The company operates
through following segments: Drug Discovery and Development, and Contract Services.
Bionomics was founded in 1998 and is headquartered in Thebarton, Australia.
You have been engaged as a consultant to evaluate an investment project into a new drug for
the company. The drug is expected to be on the market for three years. If the project is initiated,
it will require an expenditure on research and development of 4% of the total amount that
Bionomics spent on research and development in the last financial year (2019). Also, an
investment in a new production facility, which is estimated to cost $1.5 million, will be
Bionomics uses the straight-line method to depreciate the production facility over three years.
At the end of the project life (year 3), the production line can be sold for 20% of its initial cost.
It is assumed that the tax rate for the project is 30%.
The product revenues for years 1, 2 and 3 are expected to be 58%, 56%, and 54% of the total
revenue that Bionomics has in the last financial year. The cost of goods sold is projected to be
$800,000 in years 1 and 2, but only $500,000 in year 3. The selling, general and administrative
costs are assumed to be $300,000 in years 1 and 2 but only $200,000 in year 3. In addition, the
drug will reduce the demand and therefore the cash flow obtained from an existing drug by
$200,000 each year.
In years 1 to 3, the inventory of the project is $500,000, receivables are 15% of the project
revenues, and payables are 20% of the project’s cost of goods sold. Assume that the project
requires no cash and the full value of the change in working capital due to the project will be
recovered in year 4 (i.e. after the project ends).
To obtain the latest financial statement of Bionomics, go to Bionomics homepage, then under
‘Investor relation’, click ‘Financial reporting’. When estimating the project details, use data for
the most recent year (2019) for which the financial statements are available. Annual report for
2020 has not been available at the time the assignment is written.
Please note that the above revenue and cost estimates have not taken into account future
inflation rates. To estimate the inflation rate for future years, you can use the average growth
rate of consumer price index (CPI) over the last 5 years. Quarterly data on CPI can be obtained
from RBA website.
Calculate the appropriate WACC of the project. State and justify your assumptions used in the
calculation. (30 marks)
You need to justify why the cost of capital for the project is the same as the cost of capital for
the company. Information about debt can be obtained from the annual report. For equipment
mortgage, you can assume it has a term of 4 years, and interest payments are made yearly.
For bank loan, you can assume the interest payments are made monthly. Interest payments
on Commercial bill can be assumed to be paid yearly.
Additional information on the current interest rate on business loans can be obtained from
Westpac website (Go to Westpac homepage, then click on ‘Business’ tab, choose ‘Business
loans’. Then, look for ‘View all of our business loans rates’). We assume that all interest rate
figures provided by Westpac are based on interest payments that are made on the yearly
basis. This means that when pricing a loan whose interest payments are made on a monthly
basis, you need to convert yearly interest rate to effective monthly interest rate and use the
monthly rate for discounting.
For calculation of the cost of common stock, you can use beta and market value of equity
provided by Yahoo finance. For market risk premium, you can use the average of the last 60
observations on monthly market risk premium. Monthly market return can be calculated
based on monthly All Ordinary index that can be downloaded from Yahoo finance (Go to
Yahoo Finance, type in All Ord, select historical data, then select data frequency and time
period). Remember to use Adjusted Close, since that is the index that includes dividend
payments. Also, use simple rate of return formula ((P(t)-P(t-1))/P(t-1)) to calculate market
return. For risk free rate, you can download monthly yield from government bonds from RBA
website. You can use 3 month yield or 10 year yield, but you need to use academic references
to support your decision.
Analyse the project to arrive at the cash flow for the project. Present in a table the
incremental cash flow of the project for investment activities, operating activities, working
capital, and lastly, the total incremental cash flow of the project. (30 marks)
Write the model or equation for NPV, IRR and the payback period and explain the advantages
and disadvantages of each method. Calculate the NPV, IRR and the payback period of the
project. In calculating NPV, please explain how you deal with inflation. Comment on your
findings and give your recommendations. (20 marks)
Perform a sensitivity analysis to show the change in the NPV with respect to the following
variables: product revenues, investment cost, and cost of capital. Assume the pessimistic and
optimistic scenarios for each variable as follows:
|Revenue||1.25 x baseline revenue||0.75 x baseline revenue|
|Investment cost||0.70 x baseline value||1.30 x baseline value|
|Cost of capital||0.75 x baseline value||1.25 x baseline value|
Comment briefly on your findings. (10 marks)
Q5. Your report will be submitted to the executives, so the presentation matters. Make sure
your report has a cover sheet, an executive summary and a final conclusion. The marks will
be given according to how well the report is written and presented. (10 marks)
This is an individual assignment. Deadline: Week 11 Friday, 23 October 2020, 11:55pm.
Two files will be submitted:
1. A report for the senior executives Maximum 10 pages, excluding the cover page and
the reference list.
2. An Excel spreadsheet showing the details of the calculation. The spreadsheet should
detail all the calculations you have performed to support your report. You may want to
use multiple sheets, each for a separate question. Make sure you label your calculations
correctly and clearly.
Failing to submit any of two documents will result in a mark of zero. You should name the
files as your family name followed by the first name and then content of the file. For example,
Use your name in the file name to make sure you receive the correct mark. In order to present
a comprehensive discussion, you may need to include a table of numbers in your report, such
as the model inputs or a summary of modelling results. In order to present your report
professionally, there is no need to include all the calculations in the Excel spreadsheet in the
main body of the report or in the appendix. You only need to present the numbers that are
relevant to answering the questions. Nevertheless, it is not enough to refer to the Excel
spreadsheet for the modelling results. The report should make sense by itself: the user of the
report can understand the contents without opening the Excel spreadsheet.
No extensions will be granted. For final submission, there will be a deduction of 10% of the
total available marks made from the total awarded mark for each 24 hour period or part thereof
that the submission is late (for example, 25 hours late in submission – 20% penalty). This
penalty does not apply for cases in which an application for disruption of studies is made and
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