Question

Consider the following investment opportunities:

• Opportunity A: a "me-too" oncology drug currently in Phase 3 clinical trials that requires a $100 million investment today (year 0), and if successful, provides annual profits of $100 million over its remaining 10 year patent starting in year 3 (otherwise it returns nothing). Suppose the probability of success is 50%.

• Opportunity B: a combination therapy of blinatumomab and chemotherapy designed to cure acute lymphoblastic leukemia that requires a $200 million investment today (year 0), and if successful, provides annual profits of $2 billion over its remaining 10 year patent starting in year 11 (otherwise it returns nothing). Suppose the probability of success is 5%.

1. What are the expected annual cash flows of opportunity A for years 3 to 12? (Note: Your answer should be expressed in units of millions of dollars.)

   
   

   Expected annual cash flow = $

    

    unanswered 

   
   

    

   million

   
   

2. What are the expected cash flows of opportunity B for years 11 to 20? (Note: Your answer should be expressed in units of millions of dollars.)

   
   

   Expected annual cash flow = $

    

    unanswered 

   
   

    

   million

   
   

3. Suppose we calculate the NPV of each opportunity by discounting the expected cash flows. Assume a discount rate of 12% per year for opportunity A, and 20% per year for opportunity B. What is the NPV of each opportunity? (Note: Your answer should be expressed in units of millions of dollars.)

   
   

   NPV opportunity A = $

    

    unanswered 

   
   

    

   million

   
   

   
   

   NPV opportunity B = $

    

    unanswered 

   
   

    

   million