The Board of Directors of Fizzer Co. recently approved the allocation of up to Php60 million of capital to be invested in a vaccine manufacturing facility to address the immediate need for COVID-19 immunization. As of today, the management of Fizzer Co. is assessing the best place to establish its vaccine manufacturing facility in which Philippines, India and Mexico are currently being considered by the management.

General background

COVID-19 is expected to last for a period of five-years from the time that vaccines are available and require highly specialized machines with no other use or resale value after the end of its useful life

Philippines (30% tax rate)

Fizzer have an existing facility in the Philippines which will require significant modifications for it to meet the rigorous safety requirements for the production of COVID-19 vaccines such that:

Renovation costs is expected to be at Php10 million

New machineries amounting to Php50 million will need to be imported from China in which the Company expects to incur around Php5 million for the importation, testing and installation of the new machineries

Old machineries within the existing facility currently carried at Php25 million can be sold for Php40 million as these are well maintained

The machineries to be installed in the Philippines have a production capacity of 1 million vaccines per year in which the margin is expected to be at Php10 per vaccine growing at Php1 per year

Operating expenses for the Philippines using the new machine is estimated at 20% of the Company’s margin

Considering the riskiness of Philippines, WACC is estimated at 15%

India (40% tax rate)

Fizzer will need to establish a new facility should the facility be established in India which would cost Fizzer the following:

New machineries amounting to Php45,000,000

Freight and installation cost at Php5,000,000

The machineries to be installed in India have a production capacity of 1,500,000 vaccines per year in which the margin is expected to be at Php12.50 per vaccine growing at 10% each year

Operating expenses in India is expected to be lower compared to the Philippines such that it is estimated to be only at 15.0% of margin compared to the Philippines

Considering the riskiness of India, WACC is estimated at 12%

Mexico (30% tax rate)

Fizzer will have to enter into a partnership agreement with a local vaccine manufacturer (AstroZenica) in which Fizzer will need to invest in Php20 million in cash and Php5 million in inventories while AstroZenica will invest in another Php25 million in cash. The partnership will then purchase the necessary machineries (amounting to Php45 million) needed to produce the vaccines.

Fizzer and AstroZenica will share the free cash flow at 50%-50% based on their capital contributions into the partnership.

The partnership is expected to be able to produce 1,000,000 vaccines per year in which the margin is expected to be at Php14.00 per vaccine growing at 10% per year

Operating expenses in Mexico is expected to be at 10% of margin and increasing by 1% per year (i.e., 11% in year 2, 12% in year 3, 13% in year 4, and 14% in year 5)

In response to the global health crisis, Mexico provides a 5-year tax break (0% tax) to vaccine manufacturers plus an annual government subsidy of Php1,000,000 increasing by 10% every year (compounded)

Considering the riskiness of Mexico, WACC is estimated at 12%

1. If Fizzer have unlimited capital, will the decision as to which country to invest in change? Yes or No?

2. What is the profitability index for Mexico?

For consistency, please use:

PI = 1 + (NPV/Investment Cost)

Clue - correct answer should have a string of number "15" appearing in sequence in any unit until two decimal points.

3. What is the IRR for Philippines?

Clue - correct answer should have a string of number "98" appearing in sequence in any unit until two decimal points.

PLEASE US AN EXCEL AND EXPLAIN THE PROCESS. THANK YOU.

Question

The Board of Directors of Fizzer Co. recently approved the allocation of up to Php60 million of capital to be invested in a vaccine manufacturing facility to address the immediate need for COVID-19 immunization. As of today, the management of Fizzer Co. is assessing the best place to establish its vaccine manufacturing facility in which Philippines, India and Mexico are currently being considered by the management.

General background

COVID-19 is expected to last for a period of five-years from the time that vaccines are available and require highly specialized machines with no other use or resale value after the end of its useful life

Philippines (30% tax rate)

Fizzer have an existing facility in the Philippines which will require significant modifications for it to meet the rigorous safety requirements for the production of COVID-19 vaccines such that:
- Renovation costs is expected to be at Php10 million
- New machineries amounting to Php50 million will need to be imported from China in which the Company expects to incur around Php5 million for the importation, testing and installation of the new machineries
- Old machineries within the existing facility currently carried at Php25 million can be sold for Php40 million as these are well maintained
The machineries to be installed in the Philippines have a production capacity of 1 million vaccines per year in which the margin is expected to be at Php10 per vaccine growing at Php1 per year
Operating expenses for the Philippines using the new machine is estimated at 20% of the Company’s margin
Considering the riskiness of Philippines, WACC is estimated at 15%

India (40% tax rate)

Fizzer will need to establish a new facility should the facility be established in India which would cost Fizzer the following:
- New machineries amounting to Php45,000,000
- Freight and installation cost at Php5,000,000
The machineries to be installed in India have a production capacity of 1,500,000 vaccines per year in which the margin is expected to be at Php12.50 per vaccine growing at 10% each year
Operating expenses in India is expected to be lower compared to the Philippines such that it is estimated to be only at 15.0% of margin compared to the Philippines
Considering the riskiness of India, WACC is estimated at 12%

Mexico (30% tax rate)

Fizzer will have to enter into a partnership agreement with a local vaccine manufacturer (AstroZenica) in which Fizzer will need to invest in Php20 million in cash and Php5 million in inventories while AstroZenica will invest in another Php25 million in cash. The partnership will then purchase the necessary machineries (amounting to Php45 million) needed to produce the vaccines.
Fizzer and AstroZenica will share the free cash flow at 50%-50% based on their capital contributions into the partnership.
The partnership is expected to be able to produce 1,000,000 vaccines per year in which the margin is expected to be at Php14.00 per vaccine growing at 10% per year
Operating expenses in Mexico is expected to be at 10% of margin and increasing by 1% per year (i.e., 11% in year 2, 12% in year 3, 13% in year 4, and 14% in year 5)
In response to the global health crisis, Mexico provides a 5-year tax break (0% tax) to vaccine manufacturers plus an annual government subsidy of Php1,000,000 increasing by 10% every year (compounded)
Considering the riskiness of Mexico, WACC is estimated at 12%

1. If Fizzer have unlimited capital, will the decision as to which country to invest in change? Yes or No?

2. What is the profitability index for Mexico?

For consistency, please use:

PI = 1 + (NPV/Investment Cost)

Clue - correct answer should have a string of number "15" appearing in sequence in any unit until two decimal points.

3. What is the IRR for Philippines?

Clue - correct answer should have a string of number "98" appearing in sequence in any unit until two decimal points.

PLEASE US AN EXCEL AND EXPLAIN THE PROCESS. THANK YOU.

Accepted Answer

1.Given -

In response to the global health crisis, Mexico provides a 5-year tax break (0% tax) to…