Cash outlay

Using the last two indicators, compare the following two plants, each having a cash outlay of 25,000,000. Plant 1 will earn a profit of 10,000,000 for each of 4... 

IRR is the rate of return (interest rate, discount rate) at which the future cash flows (positive plus negative) would equal the initial cash outlay (a negative cash flow). The value of the IRR relative to the company standards for internal rate of return indicates the desirability of an investment ... 

Internal rate of return (IRR) the interest or discount rate for which the future net cash flows equal the initial cash outlay. 

Cash Payback is calculated by a cash flow analysis. The cash flow generated by an investment is the cash value of the benefits it achieves less the cash outlays to pay for the capital investment. Assuming that the system s costs precede its benefits, cash... 

There may well, on occasions, be people reading this book who wish to make sure that their data is reliable, but who cannot afford either the time delay or the cash outlay needed to acquire a selection of appropriate certified reference materials. Fortunately, there are other useful approaches worthy of consideration which allow detection of spectral, chemical, or transport interferences in analytical flame spectrometry. 

A capital investment is required for any industrial process, and determination of the necessary investment is an important part of a plant-design project. The total investment for any process consists of fixed-capital investment for physical equipment and facilities in the plant plus working capital which must be available to pay salaries, keep raw materials and products on hand, and handle other special items requiring a direct cash outlay. Thus, in an analysis of costs in industrial processes, capital-investment costs, manufacturing costs, and general expenses including income taxes must be taken into consideration. 

Depreciation charges are the most common type of tax allowance used by governments as an incentive for investment. Depreciation is a noncash charge reported as an expense, which reduces income for taxation purposes. There is no cash outlay for depreciation, and no money is transferred to any fund or account, so the depreciation charge is added back to the net income after taxes to give the total cash flow from operations. 

Figures for environmental expenditure are provided in the annual report. In 1999 PPG had cash outlays of US 22 million and charges against income of US 10 million in relation to environmental remediation. It also had reserves for environmental contingencies of US 82 million, although it is stated the Company may be subject to loss contingencies related to environmental matters estimated to be as much as 200 million to 400 million .

The average aftertax R D cash outlay for each new drug that reached the market in the 1980s was about 65 million (in 1990 dollars). The R D process took 12 years on average. The full aftertax cost of these outlays, compounded to their value on the day of market approval, was roughly 194 million (1990 dollars). 

Cash outlays required to produce the successes (and to pay for the abandoned projects along the way),... 

There is only one way to get information on both the amount and timing of cash outlays required to produce a successful NCE take a large and representative sample of R D projects and, for each project, record incurred costs month-by-month until the project is either abandoned or approved for marketing. Then, outlays over time can be converted to their present value in a particular reference year at the appropriate cost of capital. The present value of outlays per approved NCE is the average cost of bringing an NCE to market. 

OTA s approach to R D cost assessment relied on a detailed analysis of the validity of the Hansen and DiMasi studies. First, OTA examined the validity of the methods used to estimate each component of R D costs (cash outlays, project time profiles, and success rates). Second, OTA tested the consistency of the resulting estimates with corroborative studies. Third, OTA examined whether the rate of increase in real (i.e., inflation-adjusted) R D cost implied by the two studies is consistent with data on trends in major cost drivers, such as the number of subjects of clinical trials, biomedical research personnel costs, and animal research costs. 

Total cash outlays per successful new NCE were estimated at 65.5 million (in 1990 dollars) by Hansen and at 127.2 million by DiMasi, a 94 percent increase in estimated outlays per successful new drug over the period of the two studies. The two studies suggest that real (inflation-adjusted) R D cash outlays per successful NCE increased at an annual rate of about 9.5 percent. 

The increase in cash outlays per success was moderated by an improvement in the success rate of NCEs over time. Whereas Hansen projected only 12.5 percent of the NCEs would ultimately get FDA approval for marketing, DiMasi and colleagues estimated that about 23 percent of the projects would be successful. Without this improvement, the reported increase in cash outlays per success would have been even higher. 

OTA found two principal threats to validity of the methods used to estimate cash outlays per success 1) the small number of NCEs in the samples, especially in the Hansen study and 2) the reliance on unverifiable cost data that responding companies supplied. Although most companies were capable of estimating the costs associated with discovery and development of particular NCEs with reasonable accuracy, inherent differences in the structure of cost-accounting systems across companies introduce potential inconsistency and bias. More importantly, any company that understood the study methods and the potential policy uses of the study s conclusions could overestimate costs without any potential for discovery. Thus, the motivation to overestimate costs cannot be discounted. 

Because of these threats to validity, OTA looked for corroborative evidence on cash outlays per success. Aggregate annual data on industry R D spending and NCE approvals in the United States are readily available and reasonably verifiable. In a study using industry-level spending data, Wiggins estimated R D cash outlays per successful NCE at 75 million (in 1990 dollars) (520). 

A similar analysis was not available to cover the time period of DiMasi s study, but OTA checked the results of the DiMasi study against data on aggregate R D spending by the U S. industry and the total number of self-originated NCEs introduced by these companies. OTA s check revealed a substantial consistency between aggregate R D spending estimates and the cash outlays per NCE estimated by DiMasi study (see chapter 3 for details). 

Had today s marginal corporate tax rate (34 percent) been in effect at the time the NCEs in DiMasi s study were developed, the net after-tax cash outlay per successful NCE would have been no more than 80.1 million, and the full cost capitalized at a 10 percent cost of capital would be 171 million. At today s tax rate, with a cost of capital decreasing from 14 to 10 percent over the life of the project, the average cost of developing a new drug would be no more than 237 million. 

The preclinical cash outlays required to discover or design a potential therapeutic compound and then to determine whether it is worth testing in humans ... 

I Costs of Production Sales revenues from new products must be reduced to reflect the cash outlays required to manufacture and sell them, and the ongoing R D costs required to produce follow-on products or to justify new uses for the NCE. The net cash flows induce additional tax liabilities as well. OTA estimated these costs using data as available and... 

R D is an investment in a potential future stream of revenues from the sale of successful new drugs. Unlike other kinds of investments, such as a new manufacturing plant, the success of a pharmaceutical R D investment is highly uncertain and may take many years to be realized. The investors in pharmaceutical R D must be able to expect not only to recoup their actual cash outlays for R D but also to be compensated for the risk they took of losing their investment altogether and for the time they spent waiting for the investment to pay off. Without such an expectation, no investor would put his or her money on the line. 

The full cost of bringing a new drug to market, as defined above, is clearly higher than the cash outlays spent to discover and develop successful new drugs. It also includes the cash outlays spent on projects that fail. And, it must include the opportunity cost of capital, the rate of interest that dollars invested at a given level of risk must earn in exchange for being tied up in the investment (59,285). 

The reported expenditures don t correspond exactly to cash outlays because charges for indirect costs, overhead, or capital equipment and facilities may be made using allocation or depreciation methods that don t correspond in time to actual cash outlays. The term cash costs is used here to differentiate the reported expenditures from their present values in the year of market approval. 

Table 3-2-Cash Outlays per Successful New Chemical Entity Hansen and DiMasi ( 1990 millions) ...

Study Study years Clinical (midpoint) cost cost As percent of total cost Total cash outlays per success... 

Because the estimated ratio of preclinical costs to clinical costs was higher in the later study than in the early study, the increase in real cash outlays is somewhat greater for preclinical costs than for clinical period costs, but the annual rates of increase were not very different-10.3 percent per year for preclinical costs compared with 8.3 percent per year for clinical period costs. 

All of the R D cost studies described above begin with estimates of R D cash outlays in each phase of development, the time required to complete each phase, and the success rate for projects in each phase of the process. These estimated cash flows are then capitalized with a cost of capital that differs among studies. The validity of the studies rests ultimately on the accuracy of the estimates of cash outlays and the timing of those outlays. In this section, OTA analyzes the validity of the estimates of cash... 

Are the estimates of cash outlays accurate OTA addressed this question in two ways. First, we critically assessed the validity of the methods and data sources used to arrive at the estimates and the potential importance of departures from full validity. Second, we attempted to corroborate the findings with data from independent or semi-independent sources. 

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