Problem
Pfizer Inc is an American multinational pharmaceutical company. After extensive medical and marketing research, Pfizer believes it can penetrate the antiviral drugs market. It is considering two alternative products. The first is an emergency medication for coronavirus (COVID-19) for people ages 12 and older. The second is a pharmacy medicine for the same virus but for patients ages 18 and older. Both products would be introduced at a price of £8.75 per package in real terms. The emergency medication is projected to sell 2 million packages a year, whereas the pharmacy medicines would sell 4.0 million packages a year. Cash costs of production in the first year are expected to be £4.65 per package in real terms for the emergency medication. Production costs are expected to be £5.20 in real terms for pharmacy medicines. All prices and costs are expected to rise at the general inflation rate of 2 percent.
Either product requires further investment. The emergency medication could be produced using equipment costing £18 million. That equipment would last three years and have no resale value. The machinery required to produce the pharmacy medicines would cost £31 million and last three years. The firm expects that equipment to have a £1,000,000 resale value (in real terms) at the end of Year 3.
The firm uses straight-line depreciation and has a tax rate of 21 percent. The appropriate real discount rate is 8 percent.
Task
Pfizer has hired you as a consultant to evaluate the investment options. Advice Pfizer the best option(s) with clear explanations. You should specify any additional assumptions you make in your analysis.