Question

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 $1 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 8% per year?

Answer 1

Discount rate	8.0000%
Cash flows	Year	Discounted CF= cash flows/(1+rate)^year	Cumulative cash flow
-	0	-	-
1.000	1	0.93	0.93
1.020	2	0.87	1.800
1.040	3	0.83	2.63
1.061	4	0.78	3.41
1.082	5	0.74	4.14
1.104	6	0.70	4.84
1.126	7	0.66	5.50
1.149	8	0.62	6.12
1.172	9	0.59	6.70
1.195	10	0.55	7.26
1.219	11	0.52	7.78
1.243	12	0.49	8.27
1.268	13	0.47	8.74
1.294	14	0.44	9.18
1.319	15	0.42	9.60
1.346	16	0.39	9.99
1.373	17	0.37	10.36

the present value of the new drug = 10.36 million