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Corporate Finance : Fundamentals of Capital Budgeting

As a new member of the capital budgeting

division of Novo Nordisk A/S, you have been asked to determine the net cash flows and the NPV of a proposed new diabetes drug. The drug is expected to be on the market for three years only, because Novo expects to launch a new and better version of the drug in the near future. If the project is initiated, it will require an upfront (that is, year zero) expenditure on the R&D of 4% of the total amount that Novo spent on the R&D in the last financial year. Also an investment in a new production facility, which is estimated to cost $141.35 million, will be necessary.

The product revenues for years 1, 2, and 3 are expected to be 0.8%, 0.6%, and 0.4%, respectively, of the total revenue of Novo for the last financial year. The cost of goods sold (COGS) is projected to be the same percentage of the sales as in the last financial year. The overheads (sales, general, and administrative costs) are assumed to be 179.78 million EUR in the first two years and 152.54 million EUR in the last one.

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