You work for a pharmaceutical company that has developed a new drug. The patent

Question

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug's profts will be $2 million in its first year and that this amount will gro at a rate of 6% per year for the next 17 years. Once the patent expires, other pharmaceutic al companies will be able to produce the same drug and competition will likely drive profits to zero, what is the present value of the new drug if the interest rate is 9% per year? The present value of the new drug is million. (Round to three decimal places.)

Explanation / Answer

Year

cash in flow = previous year cash flow*(1+g)^n = growth rate = 65

present value of cash flow = cash flow/(1+r)^n r= 9%

1

2

1.834862

2

2.12

1.784362

3

2.2472

1.735251

4

2.382032

1.687492

5

2.524954

1.641047

6

2.676451

1.59588

7

2.837038

1.551957

8

3.007261

1.509243

9

3.187696

1.467704

10

3.378958

1.427308

11

3.581695

1.388025

12

3.796597

1.349822

13

4.024393

1.312671

14

4.265857

1.276542

15

4.521808

1.241408

16

4.793116

1.207241

17

5.080703

1.174014

present value of cash inflows

sum of present value of cash inflows

25.185

Year

cash in flow = previous year cash flow*(1+g)^n = growth rate = 65

present value of cash flow = cash flow/(1+r)^n r= 9%

1

2

1.834862

2

2.12

1.784362

3

2.2472

1.735251

4

2.382032

1.687492

5

2.524954

1.641047

6

2.676451

1.59588

7

2.837038

1.551957

8

3.007261

1.509243

9

3.187696

1.467704

10

3.378958

1.427308

11

3.581695

1.388025

12

3.796597

1.349822

13

4.024393

1.312671

14

4.265857

1.276542

15

4.521808

1.241408

16

4.793116

1.207241

17

5.080703

1.174014

present value of cash inflows

sum of present value of cash inflows

25.185

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