Question

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last

17years. You expect that the​ drug's profits will be $1 million in its first year and that this amount will grow at a rate of5%

per year for the next 17 years. Once the patent​ expires, other pharmaceutical 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 11%

per​ year?

The present value of the new drug is…….$ million.???

Answer 1

As there is profit for 17 years, 1st year being with profit of $1 m and thereafter growth of 5% for the remaining years.

Interest Rate is 11%

This is annuity with Growth and we need to find present value.

PV of Annuity with Growth Formula =

( P / (r - g) ) * (1-((1+g)/(1+r))^n)

=(1/(0.11-0.05))*(1-((1+0.05)/(1+0.11))^17) = 10.1866489324112 = 10.19 (Rounded off to 2)

Hope this helps!!