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ALLCURE Inc. has been spending in research and development (R&D) for a next generation diabetes drug since July 2017. Although the firm has spent $0.70 million for R&D during the last 14 months, it is now predicted that achieving a target result in this research may take another 6 to 8 years’ time. In the meantime, despite huge controversy, the company is planning to introduce the revolutionary pre-version of this drug, called P-REC, which might cause long-term health hazards for some patients due to unknown reasons. Before introducing this product in the market, the Chief Financial Officer (CFO) of ALLCURE Inc. is asking for a detail analysis on PREC project. The production line for P-REC can be started after renovating one existing section of the factory. The project is expected to run for eight years when the targeted final version of P-REC will be ready to introduce. Required renovation can be conducted immediately at a cost of $185,000 that includes installation cost of new plant and equipment (P&E). The company has decided to capitalise total renovation costs to new P&E. The procurement of human resources (HR) required for the project will be one-off cost at the beginning and estimated to be $40,000. The project requires continuing quality assurance inspection that will cost $5,000 per month.

Quantitative Analysis

The assessment aims in evaluating the two-product line that is aimed by ALLCURE Inc. to produce in future, for increasing its revenue generation capability. The analysis is based on Investment appraisal techniques, which is used for detecting the financial viability of the proposed projects. In addition, adequate evaluation of the qualitative analysis has been conducted in the assessment for identifying social viability in approving the project. ALLCURE Inc. deals with medicines, which can have negative and positive impact on the health of the consumer that directly raises the social concerns of the CFO, while making any kind of investment decisions. The recommendations an adequate justification for the recommendation is demanded by the CFO who intends to start one of the proposed projects for ALLCURE Inc. Detailed comparison and  justification for the proposed project has been conducted for allowing the CFO to make adequate investment decisions based on both quantitative and qualitative analysis.

The quantitative analysis evaluates the net present value, discounted payback period, and internal rate of return of the two proposed project. From the evaluation, it could be identified that T-REC project is acceptable, as it complies with the requirements of the firm. According to the case study, the organization needs the minimum 5-year discounted payback for the project to be accepted, as an adequate investment options. Moreover, the payback period of P-REC is at 6.1 years, whereas T-REC payback period is 4.9 years. Therefore, in accordance with the payback period criteria the T-REC project needs to be selected by the organization. The investment appraisal techniques such as present value and internal rate of return are also evaluated in the calculation, which indicates alternative results. The internal rate of return directly highlight that T-REC project is viable for the organization as it has a value of 25.61% in comparison to 24.35% for P-REC. However, the net present value evaluation of the project provides an alternative recommendation, as P-REC value is higher than T-REC. As per the investment appraisal rules, the project with higher net present value needs to be selected by the organization, as it evaluates the future cash flow by using time value of money. The analysis of the project based on 18% discount rate, where project P-RE C needs to be selected by the organization. Baum and Crosby (2014) stated that projects are evaluated on the basis of NPV, as it allows the organization to detect the investment options, which can increase firm value in the long run.

Net Present Value Calculation

The analysis of the investment appraisal technique has been conducted with the discount rate of 24% to identify the financial viability of the projects. After revaluating the investment appraisal techniques such as net present value and discounted payback period with a discount rate of 24%, the financial viability of the project the is detected. The cashew conditions of the project will not be altered, as only the discounting rate has been changed from 18 % to 24%. From the overall calculation, it is detected that Net present value of P-REC has declined exponential, which has increased the financial viability of T-REC project. In addition, the payback period calculated about the projects directly highlight that T-REC project is much more viable for investment P-REC project. However, raising the discounting rate will not allow the project comply with the discounted payback period terms of the organization. Harris (2017) argued that without adequate research the investment appraisal techniques could provide wrong information and data to the company.

The third quantitative measure that is conducted in the calculation in accommodating research and development cost for P-REC. This mainly helps in detecting whether the investment will provide adequate returns to the organization. After implementing research and development cost, the net present value of the project P-REC is higher than T-REC. Hence, under the circumstances, it could be understood that the financial capability of project P-REC is considered viable in comparison to project T-REC. Therefore, from the valuation it can be understood that the investment appraisal techniques highlight P-REC, as the most viable investment options if NPV is considered. On the other and, T-REC projects in only consider if the company emphases more on discounted payback period and internal rate of return calculations. Throsby (2016) mentioned that investment appraisal techniques allow the organization to evaluate the project under present value, which clears the investment prospects for the organization.

Qualitative analysis helps the CFO of ALLCURE Inc. to identify the socially acceptable investment option, which does not have negative impact on the image of the organization. The analysis is based on the image and social commitment ALLCURE Inc. for using adequate investment option that does not affect the consumer’s health. The qualitative analysis of P-REC indicates that the project is not adequate for commencement, as there is huge controversy regarding the long-term health hazard that can have negative impact on health of the consumers. Moreover, the P-REC drug is introduced as a revolutionary pre-version of the actual medicine, where it has alternative flaws, which can negatively affect the health conditions of the consumer. On the other hand, the analysis of T-REC drug indicates that there is no harmful effect on the consumers as projector in the report. In addition, the T-REC drug is considered to be less effective with the traditional treatment plan. This would directly reduce the demand among potential customers, as its impacts are relatively low (Vesty and Oliver 2014).

Discounted Payback Period Calculation

Hence, the qualitative analysis mentions about the ethical viability, while making adequate investment decisions. Therefore, from evaluation it could be understood that Investments T-REC is considered to be viable, as it does not have negative impact on the health of the customers. However, after collecting the report of P-REC after 8 years, the company can adequately start the project on the basis of the publisher report. Research and development information will allow the organization to improve the current performance of P-REC drug and reduce its negative impact on the customer’s health (Hoesli and MacGregor 2014).

After evaluating the quantitative and qualitative analysis for both the projects, it could be identified that investment in T-REC is much more profitable for the organization can investing in P-REC. According to the quantitative method, the net present value of T-REC is higher when the discounting rate increases to 24%. In addition, the analysis based on internal rate of return and discounted payback Period of the organization directly highlights project T-REC, as the most viable investment option. Moreover, the qualitative Analysis also highlight that investment in T-REC is more socially acceptable, as it does not have any kind of side effects to the consumer of the medicine. On the other hand, the P-REC medicine that has proposed by the organization is still in research and development stage, where it has certain harmful effects on consumer, which cannot be rectified or detected until now.

Comparison between T-REC and P-REC

T-REC

P-REC

Socially Acceptable as considered safe

Socially Not Acceptable considered harmful

NPV is higher only under 24% discounting rate

NPV is higher only under 18% discounting rate

Discounting payback period and Internal rate of return is acceptable

Discounting payback period and Internal rate of return is not acceptable

Research has been completed with adequate data

Research has not been completed, where the results will be declared after 8 years


The above detailed analysis or comparison of the project mainly states the Financial and ethical viability of T-REC project on comparison to P-REC project. The further evaluation of both projects directly highlight that investment can be conducted in T-REC as well as P-REC. however, the Investment on both the project is to be conducted in different timelines, as P-REC report will be generated after 8 years until that T-REC project will be completed. Therefore, both the projects can be accommodated, which will generate adequate income in the long run that can eventually help is improving the substantial growth condition of the organization. Hence, it is recommended for the organization that Investments T-REC can be conducted immediately, while P-REC project can be accommodated after the completion of the R&D report.

Conclusion:

After evaluating both the investment options, it could be identified that Investments T-REC is both financially and socially viable for the organization. Moreover, after validating the calculations to can be detected that the increment in discounting rate from 18 % to 24% directly indicate financial viability of T-REC project in comparison to P-REC project. The adequate comparison between T-REC project and P-REC project has been conducted, which highlights the financial viability of T-REC investment option. The net present value of P-REC is only hire when the discounting rate is 18%, which reduces the financial viability of T-REC. However, after evaluating all the relevant information regarding the qualitative and quantitative analysis, it can be detected that investment T-REC is highly beneficial for the organization. Therefore, ALLCURE Inc. can start the project with T-REC and after getting the report from R&D about P-REC, the next project can be started.

Reference and Bibliography:

Alkaraan, F., 2016. Strategic investment decision-making–Scanning and screening investment opportunities: The expansion of Guinness in West Africa. Meditari Accountancy Research, 24(4), pp.505-526.

Baddeley, M., 2017. Investment: Theories and Analyses. Macmillan International Higher Education.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

Chaysin, P., Daengdej, J. and Tangjitprom, N., 2016. Survey on Available Methods to Evaluate IT Investment. Electronic Journal Information Systems Evaluation Volume, 19(1).

Elmassri, M.M., Harris, E.P. and Carter, D.B., 2016. Accounting for strategic investment decision-making under extreme uncertainty. The British Accounting Review, 48(2), pp.151-168.

Harris, E., 2017. Strategic project risk appraisal and management. Routledge.

Hoesli, M. and MacGregor, B.D., 2014. Property investment: principles and practice of portfolio management. Routledge.

Jorge-Calderón, D., 2016. Aviation investment: Economic appraisal for airports, air traffic management, airlines and aeronautics. Routledge.

Kafuku, J.M., Saman, M.Z.M., Sharif, S. and Zakuan, N., 2015. Investment decision issues from remanufacturing system perspective: literature review and further research. Procedia CIRP, 26, pp.589-594.

Locatelli, G., Invernizzi, D.C. and Mancini, M., 2016. Investment and risk appraisal in energy storage systems: A real options approach. Energy, 104, pp.114-131.

Throsby, D., 2016. Investment in urban heritage conservation in developing countries: Concepts, methods and data. City, Culture and Society, 7(2), pp.81-86.

Vesty, G. and Oliver, J., 2014. Corporate strategy and accounting for sustainability in investment appraisal. Corporate Ownership and Control, 11(2D), pp.377-388.

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