Corporate Finance – BAFI2094 Sample HD

1. I. Introduction

Pharmacity, a leading Vietnamese convenient pharmacy chain, has solidified its reputation as a trusted provider of pharmaceutical and wellness products (Mekong Capital 2023). With an extensive network of conveniently located stores, Pharmacity has become a pillar in the healthcare ecosystem, offering a wide range of products and services to cater to diverse health and well-being needs (Mekong Capital 2023). In the dynamic landscape of pharmaceutical retail, Pharmacity has the plan to expand into Australian market. It is considering between introducing a new product line of the following two: multivitamins for middle-age men (project 1) and vitamins for pregnant women (project 2). In this paper, opportunities and insights to assist Board of Directors in making informed product selection decisions will be provided through the analysis of market dynamics, financial viability, and borrowing options. It is expected that Pharmacity can select the optimal product line and financing strategy, setting the stage for a successful entry into the Australian market.

1. II. Borrowings option and projects evaluation 1. Borrowing option

As Pharmacity aims to expand into Australia and introduce new product lines, the decision regarding the borrowing method is critical. The company has demand on source of finance for the initial investment and working capital. Besides, they also consider between two options which are issuing bonds and borrowing from banks.

Each method will have its benefits and drawbacks. For issuing bonds, this approach might offer lower interest rates compared to bank loans (Field et al. 2022). Besides, bonds can attract a diverse range of investors, potentially leading to increased demand (Field et al. 2022). From that, the company can access to a wider investor base. Moreover, it also can get long-term financing, aligning with Pharmacity’s 10-year repayment plan (Field et al. 2022). Nevertheless, to issue corporate bond, Pharmacity has to face up to several challenges. For example, it needs to establish credibility in the Australian market to attract bond investors (Gozzi et al. 2015). Besides, issuing bonds involves adherence to regulatory standards, which can be complex and time-consuming (Gozzi et al. 2015). In terms of borrowing from banks, the method can bring some advantages such as it can offer more flexibility in terms and conditions, accommodating specific business needs (Weston and Yimfor 2023). Otherwise, bank loans might have a faster approval process compared to bond issuances (Weston and Yimfor 2023). However, these could have higher interest rates compared to bonds, leading to increased borrowing costs (Kim et al. 2023). Besides, it also might require collateral, which could tie up company assets (Kim et al. 2023). Several findings about Australian debt market had been conducted along with some calculations. Below are computation of borrowing loan from bank method for both projects.

Interest rate 4.45%

Principal 24,500,000

Time 10 years

The principal above is for project 1. The interest rate is the average lending rate among the three biggest banks in Australia which are AnZ (4.85%), Westpac (4.25%) and Commonwealth (4.25%) (AnZ 2023; Westpac 2023; Commonwealth 2023).

=> FV = $37,866,083                 

Interest rate 4.45%

Principal 21,000,000

Time 10

The principal above is for project 2. => FV = $32,456,653

On the other hand, the computation of issuing bond method is presented as below.

Coupon rate 4.16% (S&P Global 2023)

Par value 24,500,000

Maturity 10

YTM 4.45%

=> FV of bond value = $34,692,000

Coupon rate Par value Maturity (years) YTM

4.16% (S&P Global 2023) 21,000,000

10 4.45%

=> FV of bond value = $29,736,000

From that, it can be seen that for both projects, if Pharmacity uses bank loan as source of finance, the total amount that company had to pay after 10 years is higher than that of using bond issuance. Furthermore, corporate bond market in Australia is facilitated to develop (Reserve Bank of Australia 2022). Thus, the company should choose bond issuance as its priority borrowing option.

2. 2. Projects evaluation

Table 1 Figures of Project 1

The provided table presents the outcomes of the anticipated cash flow arising from the implementation of Project 1. This is derived from the amalgamation of net income and depreciation. Additionally, Pharmacity anticipates generating sales demand and is factoring in the impact of inflation, which mirrors its approach to cost assessment. Below are the index of inflation rate, growth rate and discount rate which will be used in this paper for calculation. In determining the appropriate discount rate, it is crucial to recognize that the company is foregoing the chance to engage in an alternate project and realize profits from it. This concept is known as opportunity cost, and consequently, investors would require an equivalent or greater interest rate. Hypothetically, if the company were to deposit funds in a bank, it would receive interest. Consequently, in this scenario, the average interest rate offered by the three largest banks in Australia is employed to approximate the discount rate.

Inflation rate Growth rate Discount rate

6% (Trading Economics 2023) 3.66% (Statista 2023)

4.45%

Additionally, Pharmacity carried out an all-encompassing assessment of the expense and income forecasts for Project 2. The commencement necessitates an initial expenditure of $21,000,000 and anticipates a duration of 16 years. Correspondingly, the project is projected to encounter analogous growth rate, inflation rate, and market-based discounted rate as that of Project 1.

Table 2 Figures of project 2

The expected cash flow for project 2 is estimated by the same way as project 1.

To determine the optimal project choice, the company must utilize appraisal methodologies due to its ability to undertake only a single project. The frequently employed technique for project evaluation is the net present value (NPV) method (Siziba and Hall 2021). This approach assesses the current value of all future cash inflows and outflows relevant to the project. Project 1 yields an NPV of $40,407,397, while the alternative project displays an NPV of $45,588,549. Even though both projects exhibit positive NPVs, the organization is constrained to select just one.

However, relying solely on the NPV method might not offer comprehensive conclusions. This is because the method assumes specific factors concerning the discount rate and lacks accurate when comparing projects of varying sizes (Siziba and Hall 2021). Consequently, it becomes imperative to incorporate alternative techniques for gauging project profitability alongside the NPV method (Siziba and Hall 2021). One such method is the Internal Rate of Return (IRR) technique, which aids in ascertaining the projected rate of return generated by the project (Siziba and Hall 2021). Conversely, the payback period illustrates the duration necessary to recover the initial investment using the project’s incoming cash flows (Siziba and Hall 2021).

Upon evaluating these methodologies, the investment in the multivitamin for middle-aged men showcased superior performance compared to the project involving vitamin production for pregnant women. The former project exhibits an Internal Rate of Return (IRR) of 21%, surpassing the IRR of 19% for the latter project. Furthermore, Project 1 boasts a payback period of slightly over 5 years, whereas the alternate project’s payback period extends to just over 6 years. Consequently, Project 1 emerges as the chosen option due to its anticipated capacity to yield greater returns within a comparatively shorter timeframe.

III.       Potential risks when entering in new foreign market

When Pharmacity embarks on its expansion into the Australian market with multivitamin products for middle-age men, several potential risks must be addressed to ensure the project’s success. Firstly, market competition stands as a formidable challenge, with established brands and pharmacies already present (Cavusgil et al. 2020). It means company should do comprehensive market research to identify gaps and devise unique selling points for Pharmacity’s products. From that, products of company may have chance to compete with domestic competitor. Secondly, in Australia, there are many intricate regulatory about pharmaceutical and supplement standards (Cavusgil et al. 2020). Thus, partnering with regulatory experts and legal advisors will guarantee compliance for Pharmacity. Thirdly, the variability in demand for vitamins and supplements due to evolving consumer preferences pose another risk (Flor and Moritzen 2020). It requires that the company needs to diversify product portfolio and vigilant trend monitoring. Besides, Pharmacity should also stay abreast of technological advances in the industry and invest in research and development to keep products relevant. Moreover, as a foreign company, when expanding into an abroad market, currency exchange rate fluctuations loom as a concern. However, these can be mitigated by using financial instruments to hedge against currency risk such as option (Amankwah-Amoah and Wang 2019). Following that, borrowing risks must also be considered, with fluctuating interest rates and repayment obligations. In addition, cultural differences between Vietnam and Australia can cause obstacles (Flor and Moritzen 2020). Therefore, understanding cultural nuances is vital to effective product positioning and customer engagement. From that, through these proactive measures, Pharmacity can navigate the potential risks and lay a solid foundation for its successful venture into the Australian market.

1. IV. Qualitative factors and recommendation

As Pharmacity ventures into the Australian market with its multivitamin product line tailored for middle-age men, it is essential to consider a range of qualitative factors that can impact the project’s success. Beyond financial considerations, the ecological, environmental, social, and economic implications play a crucial role in shaping the project’s long-term viability and its contribution to sustainable growth. This section will dissect into these qualitative factors and proposes some recommendation for Pharmacity’s Board. Firstly, the production and distribution of pharmaceutical products, including multivitamins, often carry ecological implications due to energy consumption, waste generation, and carbon emissions (Hanel and Carlberg 2020). The sourcing of raw materials, processing, and transportation contribute to the project’s ecological footprint (Hanel and Carlberg 2020). To mitigate these effects, Pharmacity can adopt various strategies. For example, designing packaging using recyclable and biodegradable materials because it can significantly reduce waste and minimize the impact of packaging on the environment. Besides, to diminish the carbon footprint when transporting goods, Pharmacity should consider implementing efficient transportation practices such as route optimization and using low-emission vehicles. Moreover, the company also can partner with suppliers who adhere to ethical and sustainable sourcing practices can help ensure that the raw materials used in multivitamins are obtained responsibly, without negatively impacting ecosystems. Secondly, in terms of environmental implication, it can be seen that the procurement of raw materials for multivitamin production, although on a smaller scale compared to some industries, does have the potential to impact ecosystems and biodiversity (Van Kernebeek et al. 2014). Pharmacity must be diligent in understanding and addressing these potential environmental consequences by adopting proactive measures that align with sustainable practices. One outstanding solution is that ensuring ethical sourcing practices as it is paramount to minimizing the negative impact on ecosystems and biodiversity. By encouraging suppliers to use sustainable agricultural practices, such as organic farming and integrated pest management, the environmental impact of farming practices can be reduced. From that, Pharmacity can avoid ingredients sourced from endangered or threatened species or regions where harvesting is unsustainable. This approach also helps preserve biodiversity by preventing the overexploitation of vulnerable species and habitats. Thirdly, Pharmacity’s multivitamin project has the potential to positively impact society by promoting health and wellness (Piórecka et al. 2022). However, it is important to consider the social implications to ensure that the project benefits all segments of the population. The company can provide affordable options for disadvantaged populations, such as lower-income individuals. It can help to promote health equity and ensure that the benefits of the product are accessible to all. Otherwise, Pharmacity should collaborate with local healthcare organizations to provide health education programs can empower consumers to make informed choices about their health and wellness, thereby promoting better long-term outcomes and maintaining reputation. Last but not least, while the primary focus of the project may be on revenue generation, it is imperative to recognize the economic implications. The success of the project can promote economic growth in the regions where it operates. Therefore, prioritizing local suppliers and partners can stimulate economic activity and create employment opportunities. Furthermore, ensuring fair wages and safe working conditions for employees involved in the production and distribution can contribute to sustainable the growth of Pharmacity and employee satisfaction. Based on the implications above, there are several recommendation for Pharmacity’s Board to maintain the sustainable growth of company. One outstanding feature is that investing in research to develop packaging that minimizes waste and is environmentally friendly. To do that, communicate the benefits of such packaging to consumers to encourage their support is essential. Besides, the company can organize health workshops and seminars in collaboration with local healthcare organizations. These events can educate consumers about the importance of balanced nutrition and wellness and advertise the new product also. Moreover, Pharmacity should implement initiatives that make multivitamins accessible to underserved communities, such as partnering with NGOs or offering discounted prices for individuals with limited resources. Information about the benefits of multivitamins for middle-age men, their ingredients, and the sourcing process must be provided clear and transparent. This activity can help build trust with consumers. Additionally, establish key performance indicators (KPIs) to measure the project’s ecological, environmental, social, and economic impact is also necessary. It means regularly assess and report progress to stakeholders to promptly respond to changes. This related to set up a feedback mechanisms to engage with consumers, employees, and other stakeholders to act on their suggestions and concerns to continuously improve the project’s sustainability efforts.

1. V. Conclusion

In conclusion, the decision-making process for project selection involves a multifaceted analysis that considers various factors and methodologies. The capital budgeting methods play a crucial role in aiding companies to make informed choices. Moreover, risk potential associated with each project should not be overlooked. It can be seen that inherent risks, market volatility, regulatory changes, and unexpected events can impact the project’s financial outcomes. In addition, an understanding of qualitative factors are mentioned to support company in making well-rounded decisions that align with their growth objectives and values. Eventually, some recommendation for Board of Pharmacity is given.