Question

Orchid Biotech Company is evaluating several different development projects for experimental drugs. Although the cash flows are difficult to? forecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the projects. Given a wide variety of staffing? needs, the company has also estimated the number of research scientists required for each development project? (all cost values are given in millions of? dollars).

Project Number	Initial Capital ?($ million)	Number of Research Scientists	NPV ?($ million)
I	10	2	10.1
II	15	3	19.0
III	15	4	22.0
IV	20	3	25.0
V	30	12	60.2

a. Suppose that Orchid has a total capital budget of

$60 million. How should it prioritize these? projects?

b. Suppose in addition that Orchid currently has only 12 research scientists and does not anticipate being able to hire any more in the near future. How should Orchid prioritize these? projects?

c. If? instead, Orchid had 15 research scientists? available, explain why the profitability index cannot be used to prioritize projects. Which projects should it choose? now?

Answer 1

PRofitability index= NPV+initial capital/initial capital
if this is greather than 1 we can accept
a)here for 60mn budget we can take project v,iii,ii
b)they have to tale i,ii,iii,iv since all these together they have 12 scinetists anf they utilize total 60 budget available
c)If 15 avaialbel then needs to take iv and v since here we have total 15 scientists all utilized but the total available budget no