Inputs

Demand - Year 1
Annual Growth rate
2-6 Years
7-20 Years
Unit Cost of production capacity
Depreciation rate
Year - 1: Economic parameters
Unit price
Unit variable cost
Unit capacity maintenance cost
Rate of increase
Tax Rate
Discount Rate

10000
15%
5%
1
20%
8
5
1
5%
40%
10%

Decision Variable
Capacity (units)
Computation of NPV
Year
Building Cost
Depreciation
Demand
Units Sold
Units Price
Unit variable cost
Unit maintenance cost
Financials
Revenue
Variable Cost
Maintenance Cost
Pre-Tax profit
Tax
After Tax profit
Free cash Flow
NPV

15000

2
90000
18000

18000

10000
10000

11500
11500

8
5
1

8.4
5.25
1.05

80000
50000
15000

96600
60375
15750

-3000
0
-3000
-75000

2475
990
1485
19485

146106.83

146106.83
10000
11000
12000
13000
14000
15000
16000
17000
18000
19000
20000
21000
22000
23000
24000
25000
26000
27000
28000
29000
30000
31000
32000
33000
34000
35000
36000
37000
38000
39000
40000

3
18000
13225
13225
8.82
5.5125
1.1025

18000

18000

15208.75 17490.063 20113.572

15000
15000
15000

21119.25 22175.213 23283.974

15000
15000
15000

9.261
9.72405 10.210253 10.720765 11.256803 11.819644
5.788125 6.0775313 6.3814078 6.7004782 7.0355021 7.3872772
1.157625 1.2155063 1.2762816 1.3400956 1.4071004 1.4774554

116644.5
138915 145860.75 153153.79 160811.48 168852.05 177294.65
72902.8125 86821.875 91162.969 95721.117 100507.17 105532.53 110809.16
16537.5 17364.375 18232.594 19144.223 20101.435 21106.506 22161.832
9204.1875
3681.675
5522.5125
23522.5125

16728.75 18465.188 38288.447 40202.869 42213.013

6691.5 7386.075 15315.379 16081.148 16885.205
10037.25 11079.113 22973.068 24121.722 25327.808
28037.25 29079.113 22973.068 24121.722 25327.808

44323.663
17729.465
26594.198
26594.198

5%

6%

7%

8%

9%

10%

11%

5%
24000
334863.344

6%
23000
0

7%
23000
0

8%
22000
0

9%
21000
0

10%
21000
0

11%
20000
0

10

11

24448.172 25670.581
15000
15000

12

13

14

15

16

26954.11 28301.815 29716.906 31202.752 32762.889

15000
15000
15000
15000
15000

12.410626 13.031157 13.682715 14.366851 15.085193 15.839453 16.631425

7.7566411 8.1444731 8.5516968 8.9792816 9.4282457 9.899658 10.394641
1.5513282 1.6288946 1.7103394 1.7958563 1.8856491 1.9799316 2.0789282
186159.39 195467.36 205240.72 215502.76 226277.9 237591.79 249471.38
116349.62 122167.1 128275.45 134689.22 141423.69 148494.87 155919.61
23269.923 24433.419 25655.09 26937.845 28284.737 29698.974 31183.923
46539.846
18615.939
27923.908
27923.908

48866.839
19546.736
29320.103
29320.103

51310.181 53875.69 56569.474 59397.948

20524.072 21550.276 22627.79 23759.179
30786.108 32325.414 33941.685 35638.769
30786.108 32325.414 33941.685 35638.769

62367.845
24947.138
37420.707
37420.707

12%

13%

14%

15%

16%

17%

18%

12%
19000
0

13%
18000
0

14%
17000
0

15%
16000
0

16%
15000
0

17%
15000
0

18%
14000
0

17

18

34401.034 36121.085
15000
15000

19

20

37927.14 39823.497
15000
15000

17.462997 18.336147 19.252954 20.215602

10.914373 11.460092 12.033096 12.634751
2.1828746 2.2920183 2.4066192 2.5269502
261945 275042.2 288794.31
303234
163715.59 171901.37 180496.44 189521.26
32743.119 34380.275 36099.289 37904.253
65486.238
26194.495
39291.743
39291.743

68760.55
27504.22
41256.33
41256.33

72198.577
28879.431
43319.146
43319.146

75808.506
30323.402
45485.104
45485.104

19%

20%

19%
14000
0

20%
13000
0

Inputs
Demand - Year 1
Annual Growth rate
2-6 Years
7-20 Years
Unit Cost of production capacity
Depreciation rate
Year - 1: Economic parameters
Unit price
Unit variable cost
Unit capacity maintenance cost
Rate of increase
Tax Rate
Discount Rate

10000
15%
5%
1
20%
8
5
1
5%
40%
10%

Decision Variable
Capacity (units)
Computation of NPV
Year
Building Cost
Depreciation
Demand
Units Sold
Units Price
Unit variable cost
Unit maintenance cost
Financials
Revenue
Variable Cost
Maintenance Cost
Pre-Tax profit
Tax
After Tax profit
Free cash Flow
NPV

15000

2
90000
18000

18000

10000
10000

11500
11500

8
5
1

8.4
5.25
1.05

80000
50000
15000

96600
60375
15750

-3000
0
-3000
-75000

2475
990
1485
19485

146106.83

146106.83
10000
11000
12000
13000
14000
15000
16000
17000
18000
19000
20000
21000
22000
23000
24000
25000
26000
27000
28000
29000
30000
31000
32000
33000
34000
35000
36000
37000
38000
39000
40000

18000

18000

18000

13225
13225
8.82
5.5125
1.1025

15208.75 17490.063 20113.572

15000
15000
15000

21119.25 22175.213 23283.974

15000
15000
15000

9.261
9.72405 10.210253 10.720765 11.256803 11.819644
5.788125 6.0775313 6.3814078 6.7004782 7.0355021 7.3872772
1.157625 1.2155063 1.2762816 1.3400956 1.4071004 1.4774554

116644.5
138915 145860.75 153153.79 160811.48 168852.05 177294.65
72902.813 86821.875 91162.969 95721.117 100507.17 105532.53 110809.16
16537.5 17364.375 18232.594 19144.223 20101.435 21106.506 22161.832
9204.1875
3681.675
5522.5125
23522.513

16728.75 18465.188 38288.447 40202.869 42213.013

6691.5 7386.075 15315.379 16081.148 16885.205
10037.25 11079.113 22973.068 24121.722 25327.808
28037.25 29079.113 22973.068 24121.722 25327.808

44323.663
17729.465
26594.198
26594.198

10

11

24448.172 25670.581
15000
15000

12

13

14

15

16

26954.11 28301.815 29716.906 31202.752 32762.889

15000
15000
15000
15000
15000

12.410626 13.031157 13.682715 14.366851 15.085193 15.839453 16.631425

7.7566411 8.1444731 8.5516968 8.9792816 9.4282457 9.899658 10.394641
1.5513282 1.6288946 1.7103394 1.7958563 1.8856491 1.9799316 2.0789282
186159.39 195467.36 205240.72 215502.76 226277.9 237591.79 249471.38
116349.62 122167.1 128275.45 134689.22 141423.69 148494.87 155919.61
23269.923 24433.419 25655.09 26937.845 28284.737 29698.974 31183.923
46539.846
18615.939
27923.908
27923.908

48866.839
19546.736
29320.103
29320.103

51310.181 53875.69 56569.474 59397.948

20524.072 21550.276 22627.79 23759.179
30786.108 32325.414 33941.685 35638.769
30786.108 32325.414 33941.685 35638.769

62367.845
24947.138
37420.707
37420.707

17

18

34401.034 36121.085
15000
15000

19

20

37927.14 39823.497
15000
15000

17.462997 18.336147 19.252954 20.215602

10.914373 11.460092 12.033096 12.634751
2.1828746 2.2920183 2.4066192 2.5269502
261945 275042.2 288794.31
303234
163715.59 171901.37 180496.44 189521.26
32743.119 34380.275 36099.289 37904.253
65486.238
26194.495
39291.743
39291.743

68760.55
27504.22
41256.33
41256.33

72198.577
28879.431
43319.146
43319.146

75808.506
30323.402
45485.104
45485.104

Inputs
Demand - Year 1
Annual Growth rate
2-6 Years
7-20 Years
Unit Cost of production capacity
Depreciation rate
Year - 1: Economic parameters
Unit price
Unit variable cost
Unit capacity maintenance cost
Rate of increase
Tax Rate
Discount Rate

10000
15%
5%
1
20%
8
5
1
5%
40%
10%

Decision Variable
Capacity (units)
Computation of NPV
Year
Building Cost
Depreciation
Demand
Units Sold
Units Price
Unit variable cost
Unit maintenance cost
Financials
Revenue
Variable Cost
Maintenance Cost
Pre-Tax profit
Tax
After Tax profit
Free cash Flow
NPV

15000

2
90000
18000

18000

10000
10000

11500
11500

8
5
1

8.4
5.25
1.05

80000
50000
15000

96600
60375
15750

-3000
0
-3000
-75000

2475
990
1485
19485

146106.83

18000

18000

18000

13225
13225
8.82
5.5125
1.1025

15208.75 17490.063 20113.572

15000
15000
15000

21119.25 22175.213 23283.974

15000
15000
15000

9.261
9.72405 10.210253 10.720765 11.256803 11.819644
5.788125 6.0775313 6.3814078 6.7004782 7.0355021 7.3872772
1.157625 1.2155063 1.2762816 1.3400956 1.4071004 1.4774554

116644.5
138915 145860.75 153153.79 160811.48 168852.05 177294.65
72902.813 86821.875 91162.969 95721.117 100507.17 105532.53 110809.16
16537.5 17364.375 18232.594 19144.223 20101.435 21106.506 22161.832
9204.1875
3681.675
5522.5125
23522.513

16728.75 18465.188 38288.447 40202.869 42213.013

6691.5 7386.075 15315.379 16081.148 16885.205
10037.25 11079.113 22973.068 24121.722 25327.808
28037.25 29079.113 22973.068 24121.722 25327.808

44323.663
17729.465
26594.198
26594.198

10

11

24448.172 25670.581
15000
15000

12

13

14

15

16

26954.11 28301.815 29716.906 31202.752 32762.889

15000
15000
15000
15000
15000

12.410626 13.031157 13.682715 14.366851 15.085193 15.839453 16.631425

7.7566411 8.1444731 8.5516968 8.9792816 9.4282457 9.899658 10.394641
1.5513282 1.6288946 1.7103394 1.7958563 1.8856491 1.9799316 2.0789282
186159.39 195467.36 205240.72 215502.76 226277.9 237591.79 249471.38
116349.62 122167.1 128275.45 134689.22 141423.69 148494.87 155919.61
23269.923 24433.419 25655.09 26937.845 28284.737 29698.974 31183.923
46539.846
18615.939
27923.908
27923.908

48866.839
19546.736
29320.103
29320.103

51310.181 53875.69 56569.474 59397.948

20524.072 21550.276 22627.79 23759.179
30786.108 32325.414 33941.685 35638.769
30786.108 32325.414 33941.685 35638.769

62367.845
24947.138
37420.707
37420.707

17

18

34401.034 36121.085
15000
15000

19

20

37927.14 39823.497
15000
15000

17.462997 18.336147 19.252954 20.215602

10.914373 11.460092 12.033096 12.634751
2.1828746 2.2920183 2.4066192 2.5269502
261945 275042.2 288794.31
303234
163715.59 171901.37 180496.44 189521.26
32743.119 34380.275 36099.289 37904.253
65486.238
26194.495
39291.743
39291.743

68760.55
27504.22
41256.33
41256.33

72198.577
28879.431
43319.146
43319.146

75808.506
30323.402
45485.104
45485.104

Case
Acron Pharma
Acron is a large drug company. One of its new drugs, AcrLon is coming to
production capacity to build for this drug. Government regulations make
recommendation before the drug comes into market. The drug will be sol
the drug are virtually worthless. Acron has made the following assumptio
Year 1 demand will be 10,000 units.
During years 2-6, annual growth of demand will be 15%.
During years 7-20, annual growth of demand will be 5% .
It costs $6, payable at the end of year 1, to build each unit of annual prod
line-5 year basis.
During year 1, AcrLon will sell for $ 8 per unit and will incur a variable co
The cost of maintaining a unit of capacity during year 1 is $1.
The unit price, unit variable cost and unit capacity maintenance cost will
Profits are taxed at 40%
All cash follows are assumed to occur at the end of the year and the disc
Acron wants to develop a mode so as to seek answers to the following qu
What capacity level should be chosen?
How does a change in the discount rate affect the optimal capacity level?

ugs, AcrLon is coming to the market and the company needs to determine how much annual
nment regulations make it difficult to add capacity at a later date, so Acron must determine a capacity
rket. The drug will be sold for 20 years before it comes off patent. After 20 years, the rights to produce
the following assumptions:

be 15%.
l be 5% .
each unit of annual production capacity. The cost of building capacity is depreciated on a straight-

nd will incur a variable cost of $5 to produce.

year 1 is $1.
ty maintenance cost will increase by 55 per year.

of the year and the discount rate is 10%

swers to the following questions:

e optimal capacity level?

nnual
mine a capacity
ghts to produce

n a straight-