On March 23, 2021, Pfizer announced that it aims to expand its vaccine business by becoming a leader in the new gene-based technology behind its successful Covid-19 shots. The following is a hypothetical scenario. Suppose the company undertakes a research and development project and uses the technology called mRNA to target other viruses and pathogens beyond the coronavirus. The project costs $500 million immediately and will generate a payoff of $ 1 billion next year if things go well, which happens with (65%+7%) probability. If things turn out not to work, however, the project will not generate any cash flows. The appropriate before-tax cost of capital for this project is 20% per year. The company has to pay taxes on the profit of this project at the rate of 21% (this low tax rate is a result of the US tax reform legislation enacted on 22 December 2017, i.e., P.L. 115-97), and the relevant marginal income tax rate of a representative investor of Pfizer is regarded as 30%. (i) Assuming that the project is 100% equity financed, calculate the net present value (NPV) of the project
On March 23, 2021, Pfizer announced that it aims to expand its vaccine business by becoming a leader in the new gene-based technology behind its successful Covid-19 shots. The following is a hypothetical scenario. Suppose the company undertakes a research and development project and uses the technology called mRNA to target other viruses and pathogens beyond the coronavirus.
The project costs $500 million immediately and will generate a payoff of $ 1 billion next year if things go well, which happens with (65%+7%) probability. If things turn out not to work, however, the project will not generate any cash flows. The appropriate before-tax cost of capital for this project is 20% per year. The company has to pay taxes on the profit of this project at the rate of 21% (this low tax rate is a result of the US tax reform legislation enacted on 22 December 2017, i.e., P.L. 115-97), and the relevant marginal income tax rate of a representative investor of Pfizer is regarded as 30%.
(i) Assuming that the project is 100% equity financed, calculate the
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