Nucleons Stocks in the Stock Market - Essay Example

Nucleon’s Stocks in the Stock Market INTRODUCTION Capital budgeting is described as the process of identifying, evaluating, planning and financing capital investment projects of an organization(Hilton, 482). Capital budgeting involves financing decision and investment decision(Maher, 317). Financing decision involves how the company will generate cash flows. Investment decision borders on which assets will be bought first and which will be bought later. There are two main types of capital investments. First, the cash needed to buy the equipments and other large -sum costs to produce the CRP -1 gene clone can be generated by offering the Nucleon’s stocks in the stock market. In this way, the investors in the stock market will automatically become owners or stockholders of Nucleon. Second, Nucleon can generate cash from loans. This large –sum debt will create a creditor – debtor relationship. The debtor will be Nucleon whereas the creditor will be the company or individual that lends money to Nucleon. The following paragraphs explains why the pilot in house capital budgeting is the best investment choice in this case study(Louderback, 326). BODY 1. What are your recommendations regarding the three manufacturing options for Phase I and Phase II clinical trials? I recommend that the company pursue its plans to set up its own pilot plant. This is the best choice of the three possible alternatives. For, the second alternative is not a good choice because the third party that will be contract by Nucleon may not have the capacity or the money to produce the CRP -1 gene clone. Furthermore, the most important factor in not choosing alternative 2 is confidentiality. Meaning, there is a possibility, even a small one, that the subcontracted third party will abuse its responsibility not to divulge or abuse the confidential formula or processes in manufacturing the CRP -1 gene clone(Needles, 367). In terms of risk, the third party many then set up its own marketing department and to sell the CRP -1 gene clones without reporting such sales to Nucleon and pocket the profits themselves. Further, the third party will then eat away or pirate many of CRP - gene clone clients. As for the other choice which is to license manufacturing and marketing rights to another biotechnology group, it is worst than the subcontract choice here. For, the chosen biotechnology group could then learn the secret formula and confidential processes of mass producing CRP -1 gene clones. In fact, the up -front cash that the Nucleon will receive in exchange for the secret processes and formulas given to third party to produce the CRP -1 gene clone is only a small matter. The main point here is that the there is a strong temptation on the other biotechnology group to set up its own shop and produce the CRP -1. Then this outsider company can sell the CRP -1 gene clones themselves and thus take away a sizable share of Nucleon’s CRP -1 gene clone market share(Wegandt, 374). By implementing the first choice above, Nucleon can have all the profits for themselves. To accomplish Nucleon’s chosen alternative above, Nucleon can hire managers and supervisors who will maximize the training, research and development jobs of its doctor in physics educated scientists. In addition, the main advantage for setting up a pilot plant is that the company, Nucleon, will be able to expand, in secrecy, its production activities into higher gear from its current pilot plant production to expand to bigger and better 5,000 square meter pilot research and development pilot facility in -house manufacturing facilities. 2. What are your recommendations for Phase III clinical trials and commercialization? It is highly recommended that Nucleon should venture into in -house pilot manufacturing. With the other choice of integrating into commercial manufacturing, there is a big possibility that big capital expenditures would be difficult to recover if the demand of CRP -1 suddenly drops, fades away or decreases in demand because another product ( Could be CRP -2 or CAP -3 or CPR -5, or whatever) in the near future(Maher, 565). The sound of $20,000,000 for the setting up of its full –blown manufacturing facilities plus another $ 1,000,000 in development expenditures is a big gamble that only the brave or adventurous, or maybe insanely fearless dare go into. In the same manner, licensing out manufacturing and marketing rights at Phase III runs against the grain of the confidentiality policy of many companies. For, there is a possibility, even though small, that the company that will win Nucleon’s nod as its licensed manufacturing and marketing rights may turn traitor against Nucleon in the future. Thus, Nucleon has to entertainment the possibility that the company licensed by Nucleon could break away from their deal and set up its own CRP -1 gene clone facilities after Nucleon gives the secret formula and the secret processes to produce their brainchild secrets in CRP -1. Undoubtedly, the royalty of ten percent of the subcontracted party’s sales plus Nucleon’s capital expenditure of $20,000,000 to help its partner pales in comparison with the possibility that the contracted partner will produce its own CRP -1 in the near future and leave Nucleon by the roadside crying from betrayal. 3. What are the financial implications and risks associated with your recommendations? The financial implication of my recommendation is that it is cheaper than the other alternatives. To illustrate, the pilot plant would only entail total costs shown in Exhibit 3 amounting for the years 1991 to 1993 to Construction and Equipment Costs $ 3,100, 000 Variable Production Expenses and Overhead $ 2,004,000 Pre –clinical Development costs of $250,000 and Clinical Trials (Phase III) $ 2,040,000. The total costs is only $ 7,394,000. As compared with the other choices, this is the best in terms of financial implications and risks because the secret process and formula of producing CRP -1 gene clone is priceless when contrasted with the financial implications and risks of the two other capital investment decisions(Dominiak, 347). 4. The company would look like an integrated manufacturing enterprise in ten years which includes R & D boutique. First, the company will focus all its resources and experts on successfully winning its financial, research and development, manufacturing and marketing job descriptions that are set up as organizational goals and departmental benchmarks to be hurdled. Then, when sales will increase and more money from cash inflows arrive, the company can now set it sights on metamorphosing into the integrated manufacturing enterprise in ten years or even earlier. Inclusively, the company must not let up on its current efforts to excel in the research and development boutique(Hansen, 558). CONCLUSION The capital budgeting in the Nucleon case study above entails large sums of money. Thus, if the company invests in project, it must make sure that the cash inflows generated by the project, such as the CRP -1 will be able to pay for the capital borrowed or invested by stockholders. This is the main reason why the company should choose the pilot choice above. Also, Nucleon must choose to venture on its own without having to enter into a partnership or other business ventures with third parties. For, there is a strong probability that the third party may just be trying to infiltrate Nucleon. After the third party will be able to get the secret formula and secret process that makes it a viable business, the third party may then divorce itself from Nucleon. To reiterate, the in house pilot capital budgeting choice is the best decision that Nucleon can venture into. For, the confidentiality and the secrecy of the CRP -1 formula and secret process must be guarded against traitors and other unauthorized persons. REFERENCES Louderback et al., Managerial Accounting, Thompson, N.Y.1999; p. 326 Needles et al., Managerial Accounting, Houghton Mufflin Co., N.Y., 1999; p. 367 Weygandt et al., Managerial Accounting, Wiley, N.Y., 1998; p. 374 Maher et al., Managerial Accounting, Dryden, N.Y.,; p. 565 Dominiak, G., Louderback, J., Managerial Accounting, Southwestern, N.Y.; p. 347 Hansen, D., Mowen, M., Managerial Accounting, Cincinatti, 1998; p. 558 Maher et al., Managerial Accounting, Dryden, N.Y.;1997, p. 317 Hilton, R., Managerial Accounting, Irwin Press, N.Y., 1999, p; 482 Read More