Lilly plc is a well-established Irish medical practice with a number of clinics around the country. It
Question:
Lilly plc is a well-established Irish medical practice with a number of clinics around the country. It has expanded rapidly and now wishes to continue this growth by moving into the area of cosmetic surgery. It has carried out extensive research and has identified a French company (Rouge), which has developed a number of specialist cosmetic treatments and would be willing to partner with Lilly plc in entering the Irish market. The cost of the research to date is €250,000 and the terms of a draft contract are as follows:
Lilly plc will enter a three year licensing arrangement, paying Rouge a one-off fee of €450,000 at commencement.
Specialist equipment must be purchased immediately for €400,000. This will have an expected resale value of €50,000 at the end of the contract.
An annual licensing fee of €50,000 will be paid to Rouge at the end of each year.
Lilly plc.’s research on the income potential of the new treatment indicates the following:
| year | 1 | 2 | 3 |
| Number of Treatments | 2000 | 3500 | 4000 |
| Average income per treatment | €500 | €500 | €550 |
A consultancy fee of €150 per treatment must be paid to Rouge each year.
Lilly plc. must purchase surgical materials from Rouge at a cost of €70 per treatment.
A surgeon will be employed at an annual salary of €150,000. The surgeon will be paid an annual bonus of €50,000 in any year that the number of treatments exceeds 3,000.
Extra staff will be employed for the four weeks each year while the full time surgeon is on annual leave. This will cost €10,000 per week.
Two nurses will be employed at an annual salary of €35,000 each.
A contract has been agreed with a cleaning and maintenance firm. The quarterly cost in the first year will total €20,000 with a 5% annual increase commencing in year two of the contract.
Lilly plc’s cost of capital is 10%.
Q1: What annual figure is to be included in the investment appraisal for the Licensing agreement? (do not use -)
Q2: What is the net cash flow for year 0? (use + or -)
Q3: What is the net cash flow for year 1? (use + or -)
Q4:What is the net cash flow for year 2? (use + or -)
Q5: What is the net cash flow for year 3? (use + or -)
Q6: What is the present value cash flow for year 1?
Q7: What is the present value of year 3? (use + or -)
Q8: What is the NPV ? (use + or -)
Expert Answer:
The detailed answer for the above question is provided below Q1 What annual figure is to be included in the investment appraisal for the Licensing agr... View the full answer
