Question

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last for 17 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 6% 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. I f the interest rate is 10% per year,  the present value of the new drug is ____ million.

(Please write numbers only, no "$", no ",", no "million",  round to two decimal places.  i.e. write  $1,234,567 as 1.23 )

Answer 1

present value = future value / (1 + interest rate)ⁿ

where n = number of years after which the cash flow occurs.

present value of the new drug is $46,724,926, or $46.72 million