NUCLEON

1
NUCLEON
2
DILLEMA

• Vertically integrate downstream into (pilot)
  production or buy the production on the market

3
Study question 1

• Develop a proper decision tree

4
Study question 2

• Develop a table with pros. and cons. for
• Phase III and
• Phase III

5
Pros and cons (Phase I and II)
6
Pros and Cons (Phase III)
7
Study question 3

• Based on the NPV make recommendations

• Assumptions
• Discount factor 30
• Gross sales represent after tax cash flows
• Sales after 2002 grow constantly at 5
• Depreciation tax shield CF and Phase III cost are
  approximately equal
• How do you feel about these assumptions?

• Calculating NPV
• Estimate operating CF (exhibit)
• Discount factor (30 )
• General approach (use different discount factors
  according to risk of each CF)

8
Study question 4

• Pilot plant might be used for other projects
  (products). Estimate how much can Nucleon save on
  variable expenses by investing in pilot plant

9
Real options

• Pilot plant might be used for other projects
• By investing we save on variable expense
• Investment outlay and variable expenses can be
  estimated from exhibits 3 and 4
• Calculate break-even point

10
REMARKS Financial considerations

• NPV represents expected value of many possible
  outcomes (in reality there is only one)
• Nucleon has only one project outstanding (no
  diversification)
• One aspect to consider is preference of venture
  capitalist

11
REMARKS Long term strategic options

• RD company
• RD with pilot manufacturing capabilities
• Integrated manufacturing enterprise