You are the CFO of a drug company, and you must decide whether to invest 30 million dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 10% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 1.2 billion dollars. The drug will likely generate annual profits of $200 million (starting a year after the outlay of 1.2 billion dollars) for 10 years until the patent expires. After that, it will generate a cash flow in perpetuity equal to $15 million. The discount rate is 6%. If you invest in R&D, you estimate that it will take 5 years to know whether the drug is successful or not. What is the NPV of the R&D investment?
You are the CFO of a drug company, and you must decide whether to invest 30 million dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 10% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 1.2 billion dollars. The drug will likely generate annual profits of $200 million (starting a year after the outlay of 1.2 billion dollars) for 10 years until the patent expires. After that, it will generate a cash flow in perpetuity equal to $15 million. The discount rate is 6%. If you invest in R&D, you estimate that it will take 5 years to know whether the drug is successful or not. What is the NPV of the R&D investment?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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You are the CFO of a drug company, and you must decide whether to invest 30 million dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 10% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 1.2 billion dollars. The drug will likely generate annual profits of $200 million (starting a year after the outlay of 1.2 billion dollars) for 10 years until the patent expires. After that, it will generate a cash flow in perpetuity equal to $15 million. The discount rate is 6%.
If you invest in R&D, you estimate that it will take 5 years to know whether the drug is successful or not. What is the NPV of the R&D investment?
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