You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 18 years. You expect that the drug's profits will be $5 million in its first year and that this amount will grow at a rate of 6% per year for the next 18 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 10% per year?

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 18 years. You expect that the drug's profits will be $5 million in its first year and that this amount will grow at a rate of 6% per year for the next 18 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 10% per year?

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

Problem 1PS

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You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 15 years. You expect that the drug's profits will be $3 million in its first year and that this amount will grow at a rate of 2% per year for the next 15 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 7% per year? The present value of the new drug is $ million. (Round to three decimal places.)
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 19 years. You expect that the drug's profits will be $4 million in its first year and that this amount will grow at a rate of 3 * 0/o per year for the next 19 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 12% per year? The present value of the new drug is $ (enter your response here) million.
Your firm receives an offer from the supplier who provides computer chips used to manufacture cell phones. Due to poor planning, the supplier has an excess amount of chips and is willing to sell $600,000 worth of chips for only $500,000. You already have two years' supply on hand. It would cost you $7,500 today to store the chips until your firm needs them in two years. What implied interest rate would you be earning if you purchased and store
An investment project requires an initial payment of $500,000, and then will earn a constant return of $45,000 every year forever. Is this a profitable investment project? Oyes, it is profitable O you can't tell with this information Ono, it is not profitable
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 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 2% 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? O The present value of the new drug is $ million. (Round to three decimal places.)
YOU ARE A FINANCIAL ANALYST FOR A COMPANY THAT IS CONSIDERING A NEW PROJECT. IF THE PROJECT IS ACCEPTED, IT WILL USE A FRACTION OF A STORAGE FACILITY THAT THE COMPANY ALREADY OWNS BUT CURRENTLY DOES NOT USE. THE PROJECT IS EXPECTED TO LAST 10 YEARS, AND THE ANNUAL DISCOUNT RATE IS 10% (COMPOUNDED ANNUALLY). YOU RESEARCH THE POSSIBILITIES, AND FIND THAT THE ENTIRE STORAGE FACILITY CAN BE SOLD FOR €100,000 AND A SMALLER (BUT BIG ENOUGH) FACILITY CAN BE ACQUIRED FOR €40,000. THE BOOK VALUE OF THE EXISTING FACILITY IS €60,000, AND BOTH THE EXISITING AND THE NEW FACILITIES (IF IT IS ACQUIRED) WOULD BE DEPRECIATED STRAIGHT LINE OVER 10 YEARS (DOWN TO A ZERO BOOK VALUE). THE CORPORATE TAX RATE IS 40%. DISCUSS WHAT IS THE OPPORTUNITY COST OF USING THE EXISTING STORAGE CAPACITY?
you work for a pharmaceutical comapny that developed a new drug. The patent on the drug will last 17 years . You expect the profits to be 1 million in its first year and that the amount will grow 2% for the next 17 years. the present value is if the interest rate is 11%
. Consider the problem of investing in a risky project. A project costs $500. The annual cash flow for the first year are $60 and grows at the rate of 3% annually. The risk free rate is 5%. The company WACC is 12%. . Suppose the project has an option to let you wait and decide whether to accept the project. You can invest now or next year or in two years. At the end of 2 years you either invest in the project or lose it since further deferral is not possible. The project analyst has done the calculations and has produced the binomial tree showing the cash flows from the project at future dates. Calculate the NPV of the project. p_up 0.40 $80 $70 $60 $60 $50 $40 ○ $783.21 ○ $563.45 ○ $166.67 ○ $666.67
You run a construction firm. You have just won a contract to build a government office building. It will take one year to construct it, requiring an investment of $8.96 million today and $5.00 million in one year. The government will pay you $21.50 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 6%. a. What is the NPV of this opportunity? b. How can your firm turn this NPV into cash today? a. What is the NPV of this opportunity? The NPV of this opportunity is $ 6.61 million. (Round to two decimal places.) b. How can your firm turn this NPV into cash today? (Select from the drop-down menus.) The firm can borrow $20.28 million today, and pay it back with 6% interest using the $21.50 million it will receive from the government. The firm can use cover its costs today and save next year. This leaves in the bank to earn 6% interest to cover its cost of of the in cash for the firm today. to
Al_Tech plc is considering investing in a new company, New_tech plc. It has estimated that the new tech company will cost £440,000. Cash flows from increased sales will be £160,000 in the first year. These cash flows will increase by 5% every year. Al_Tech plc estimates that New_tech plc will lose all its technological advantages in five years from now and will lose all its value. Assume that the initial cost is paid now, and all the revenues are received at the end of each year. The company requires a 12% p.a. return for such an investment. a) Calculate the NPV of the investment project. b) Calculate the profitability index and the discounted payback period. c) Should Al_Tech plc consider investing in New_tech plc? What can you say about the internal rate of return to that project? Explain. d) Explain why it is theoretically correct to assume that accepting a project with a positive NPV should increase the value of a company by the NPV of the project.
Your startup has been doing well and you think you’re just a couple of years away from an M&A exit event. You assume you’ll be able to sell the company for about $50mm, the industry average. But you need to raise $3mm now to fund you until then. You’ve received three term sheets, all with the same premoney valuation of $9mm: which one is best, from the standpoint of maximizing the amount of money you will receive from the target exit, and what key reason(s) makes this most favorable? VC Firm: 1.5x participating preferred, no cap Angel Group: Convertible debt, converting at 25% discount to exit value, $18mm conversion value cap Family Office: 3x simple preferred with a $15mm cap
4. You are considering making a movie. The movie is expected to cost $10.0 million up front and take a year to produce. After that, it is expected to make $5.0 million in the year it is released and $2.0 million for the following four years. What is the payback period of this investment? If you require a payback period of two years, will you make the movie? Does the movie have positive NPV if the cost of capital is 10.0%? **round to one and two decimals**

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