Download Spreadsheet Exercise 2

Dr. Kini
CLEAR DRUG COMPANY (CDC)
PURPOSE: This case is designed not only to test the student's knowledge of spreadsheet features,
but also to draw on their financial decision making ability. The attached actual news item is used to
build this case.
The CDC produced and marketed variety of drugs in the U.S. The drugs have been on the
market for about 10 years and had substantial consumer acceptance. With college drinking on the
rise and the social stigma on drinking alcohol still strong, the research department of CDC has
recently developed a new drug, Alcodol, which promises to eliminate the occurrence of any type of
hangover caused by drinking alcohol. Alcodol is expected to be liked by people who enjoy drinking
alcohol and social drinkers. CDC, however, is not advocating irresponsible drinking. There are no
other products in the market, but CDC thinks that inspite of patenting their product, the competition
will come up with an alternate within two years after Alcodol is introduced.
CDC's president was in the process of deciding whether or not to market the product. It is
not known whether this drug will catch on and what type of prices are consumers willing to bear.
Furthermore, it involved a substantial capital investment of about 10 million dollars in new
equipment, 1 million in working capital (which will be recovered later), and 5 million introductory
promotions and advertising, for a total of 16 million dollars initial investment. Regardless, the
potential returns are expected to be substantial.
The initial reaction from the marketing department was enthusiastic. They estimated that
the current market for Alcodol was 5 million units (each unit contains 6 capsules) per year, and, that
the total market would grow at a rate of 5% per year in the next five years. With the appeal of
Alcodol, marketing set a target of 75% percent market share (in the first year) as a reasonable goal.
(Other 25% of current hangover victims are expected to use other remedies.) Using internal target
pricing methods the price was set at $12.95 per unit. As mentioned earlier, they have budgeted an
introductory advertising campaign costing 5 million dollars (which included lobbying costs at
Washington), and $1,000,000 per year as maintenance advertising. They estimated that Alcodol
would have a life of about 5 years before a new variety needs to be brought to the market. In
addition, CDC expects that by the third year at least two competitors will bring their versions of the
drug and will cost CDC by bringing their 75% total market to 50% of the total market for years 3,4,
and 5.
CDC Controller, although more cautious than the marketing people, was also in favor of the new
drug. He pointed out that marketing department sometimes was optimistic in its estimates. He
estimated that the variable costs were $8.55 per unit, ($5.55 for ingredients and packaging and
$3.00 for marketing and distribution); fixed costs for manufacturing would be $1.5 million per year;
but stressed that these estimates were tentative. Salvage value of the plant and equipment at the end
of five years is expected to be $1,000,000. They will also retain the $1 million working capital
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from the project statement as salvage value.
If the above estimates are the normal estimates, and the margin of error is + or - 10%
evaluate the optimistic and pessimistic scenarios too.
Pessimistic scenario: increase yearly manufacturing costs, decrease total market, decrease market
growth, and decrease market share (by 10 % of the original numbers of normal scenario)
Optimistic scenario: decrease yearly manufacturing costs, increase total market, increase market
growth, and increase market share (by 10 % of the original numbers of normal scenario)
ASSIGNMENT:
1.
Develop the Decision Support excel application by completing the Cash Flow statement for
years 1-5
Consider the following:
- The life of Alcodol, for financial purposes, is 5 years
- Salvage value of plant and equipment is realized only in the last year of the Alcodol’s
life
- Ignore depreciation for this problem
2.
Be sure to show the Cash Flow and Internal Return of Return (IRR) (use EXCEL function)
Consider the following:
- Cash flows include the capital investment (considered to be a negative cash flow incurred
at project initiation year 0) and cash flows realized for each of the five years of the Alcodol's
life
3.
Using the Decision Support application developed:
- Analyze your IRR and decide which factors affect a change in the IRR to the greatest
extent.
Include a list as well as your rationale for them.
- Based on these factors, and your analysis, provide a recommendation for CDC president as
to how he/she handle situation.
Note: The computer model must be interactive, allowing the user to alter an estimate and
instantaneously receive an updated spreadsheet. In doing sensitivity analysis – marginal
impact of each variable, the user must independently change each of the estimates, from
"pessimistic" to "optimistic" while holding all other variables constant.
4.
Along with your disk supply clearly labeled printouts of exhibits for "pessimistic",
"normal", and "optimistic" scenarios. The correspondence must be in memo form, with
exhibits attached.
5.
What is the lowest price you can charge in each scenario and still make an 18 percent IRR?
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To print: Select File and then Print from
your browser's menu. This story was
printed from HealthAnswers.com.au
located at
http://www.HealthAnswers.com.au.
New drug prevents hangover
03/26/2002
By Jacqueline Head
A Melbourne-based company have developed a revolutionary drug that is claimed to prevent
people from waking up with a hangover after a big night out.
"Alcodol" is an all-natural product that is supposed to be taken before a person starts
drinking.
However the drug can be taken the following morning if symptoms such as headache,
gastric problems, and brain fog are being experienced.
Alcodol is made from a balance of branch chain amino acids, sugars, starches and vitamins,
which are all designed to target specific effects of alcohol on the body.
It was invented Australian biochemist Dr Neil McGregor, who developed it during research
into the biochemistry of pain and fatigue in chronic fatigue patients.
However Chief Executive Officer of biorevive (the company producing the drug), Willian
Crothers, says although the drug works to eliminate hangover symptoms, it is not
advocating irresponsible drinking.
"Alcodol offers those who like to drink alcohol the opportunity to enjoy the food and
alcoholic beverage and social occasion with a clear head and with no unsavoury after effect,"
he said.
It is estimated that around 9.8 million Australians drink alcohol at least two to three times
per week.
Alcodol will be distributed through pharmacies in packs of six capsules, at about $12.95 a
pack.
Editforce
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