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Novo Nordisk A/S is a health care company engaging in the discovery, development, and manufacture of

pharmaceutical products. Its specialty is diabetes care and its headquarters are in Bagsvaerd, Denmark. The company sells its products all over the world, including in the United States, Japan, China, Russia, India, and Europe.

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 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 expenditure on research and development of 4% of the total amount that Novo spent on research and development in the last financial year. Also, an investment in a new production facility, which is estimated to cost $24 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 is projected to be $8 million in years 1 and 2, but only $5 million in year 3. Finally, the selling, general, and administrative costs are assumed to be $3 million in years 1 and 2, but only $2 million in year 3.


  1. Novo has decided that the investment in the production facility should be depreciated with the straight-line method over the life of the project. Determine the amount of depreciation each year.
  2. Calculate the corporate tax rate that Novo paid for the last financial year.
  3. Use the result of Questions 2 and 3 to calculate the unlevered net income of the project for years 0 to 3.
  4. In years 1 to 3, the inventory of the project is 1.5 million, 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. Find the net working capital for the project for each year 1 to 3. Also, find the change in net working capital for each year when assuming the project is terminated in year 3 and that net working capital has to be settled the year after the project ends—that is, find the change in net working capital for years 1 to 4.
  5. Calculate the free cash flow for years 0 to 4 using Eq. 7.5. Note that you can use the unlevered net income from Question 4.
  6. Find the net present value of the project from the calculated free cash flows when assuming that the cost of capital (CoC) for Novo is 12%. You may use the NPV function in Excel. Include cash flows 1 through 4 in the NPV function and then subtract the initial cost (i.e., add the initial cash flow CF0, which is a negative number).
  7. NPV(CoC ; CF1: CF4) + CF0
  8. For a presentation of the new project to your colleagues in Novo's capital budgeting division, make a plot of the NPV as a function of the cost of capital. First, calculate the NPV of the project for a range of different assumptions of cost of capital (e.g., 5%, 10%, 15%, . . ., 40%). Then, plot the calculated NPVs as a function of the corresponding cost of capital. From the figure, note the internal rate of return of the project. Verify your result using Excel's IRR function.

Values needed for calculation


Total Revenue DKK 111,831,000  $ 16,741,167.66


Research development DKK 14,805,000  $    2,216,317.37

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