3. A pharmaceutical company has been asked to develop a vaccine to protect against a new virus. The company's financial department has put together the following estimates of the cash flows that would be involved in this project: Development research would be required for the first six months, with a total cost of 12m, incurred monthly at the end of each month - Medical trial costs of 3.45m in total, incurred continuously from the beginning of the fourth month until the end of the first year Legal and patent costs of 2.4m in total, incurred at the end of the first year Vaccine sales are expected to commence from the beginning of the second year, at an initial rate of 2.8m per annum, received monthly at the end of each month, increasing by 3% at the end of each year Vaccine sales are expected to stop eight years after the start of the project, after which time no further sales income is expected to be received The company plans to assess the attractiveness of the project by looking at both the Net Present Value (NPV), and the Internal Rate of Return (IRR). a) Explain briefly the key differences between NPV and IRR. [6 marks] The Risk Discount Rate (RDR) percentage used to calculate the NPV will be unique to you, and will be 4. abcd%, where a,b,c and d are the last four digits of your Examination Number. So, for example, if your Examination Number is 123456789, then you should use an RDR of 4.6789%; if your Examination Number is 987654321, then you should use an RDR of 4.4321%. b) Calculate the NPV the pharmaceutical company would expect to achieve on this project. You should use your unique RDR, above. [12 marks] c) Estimate, without doing any further calculations, the IRR you would expect the pharmaceutical company to achieve. You should justify the answer you give. [4 marks) [Total: 22 marks] 3. A pharmaceutical company has been asked to develop a vaccine to protect against a new virus. The company's financial department has put together the following estimates of the cash flows that would be involved in this project: Development research would be required for the first six months, with a total cost of 12m, incurred monthly at the end of each month - Medical trial costs of 3.45m in total, incurred continuously from the beginning of the fourth month until the end of the first year Legal and patent costs of 2.4m in total, incurred at the end of the first year Vaccine sales are expected to commence from the beginning of the second year, at an initial rate of 2.8m per annum, received monthly at the end of each month, increasing by 3% at the end of each year Vaccine sales are expected to stop eight years after the start of the project, after which time no further sales income is expected to be received The company plans to assess the attractiveness of the project by looking at both the Net Present Value (NPV), and the Internal Rate of Return (IRR). a) Explain briefly the key differences between NPV and IRR. [6 marks] The Risk Discount Rate (RDR) percentage used to calculate the NPV will be unique to you, and will be 4. abcd%, where a,b,c and d are the last four digits of your Examination Number. So, for example, if your Examination Number is 123456789, then you should use an RDR of 4.6789%; if your Examination Number is 987654321, then you should use an RDR of 4.4321%. b) Calculate the NPV the pharmaceutical company would expect to achieve on this project. You should use your unique RDR, above. [12 marks] c) Estimate, without doing any further calculations, the IRR you would expect the pharmaceutical company to achieve. You should justify the answer you give. [4 marks) [Total: 22 marks]