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Mfizer Sdn. Bhd. (Mfizer) is a glove manufacturer with over 30 years of experience in the industry. As the demand for the Covid-19 vaccine has been increasing, Mfizer is considering to cooperate with BioTech Bhd. (BioTech), which is a local pharmaceutical and biotechnology company, to build a vaccine manufacturing plant in Kelantan. As the finance manager of Mfizer, you have gathered the following information in respect of the new potential investment:

The investment cost of the vaccine manufacturing plant is expected to be RM80,000,000 with an expected life of three years and its scrap value is expected to be RM3,000,000 at the end of the project life.

Forecasted sales generated by the vaccine manufacturing plant are 5,000,000 doses for the first year and will be decreased by 1,000,000 doses every year. The selling price per dose is RM15 for the first year and it is expected to decrease by 10% per year.

The current variable costs are RM3 per dose and additional fixed costs are expected to be RM3,000,000 per year. The variable and fixed costs are expected to remain the same over the project life.

The existing weighted average cost of capital of Mfizer is 11% and it is a tax-exempt company. As Mfizer is not a public listed company and manufacturing vaccine is a totally new business for Mfizer, BioTechs equity beta of 1.5 will be used as a proxy. The gearing ratio (debt/(debt+equity)) of BioTech and Mfizer are 40%, and beta for debt is assumed to be zero. The required return on risk-free securities is 3% and the market risk premium is 8%. The cost of debt of Mfizer is 7.5%.

Required:

(a) Calculate the project-specific discount rate of Mfizer (rounding to the nearest percent). (7 marks)

(b) Calculate the net present value of the new investment. (9 marks)

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