Question

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 16 years. You expect that the drug's profits will be $2 million in its first year and that this amount will grow at a rate of 5% per year for the next 16 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 in millions of dollars) of the profits from the new drug if the interest rate is 8% per year? (Round your answer to two decimal places.) million

Answer 1

The present value of the new drug = [p/(r-g)] * [1-[(1+g)/(1+r)]^n]

= ($2 million / (8%-5%)) * [ 1 - (1.05 / 1.08)^16]

= $66.67 * (1 - 0.63716)

= $24.19 million

The present value of the new drug = $24.19 million