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In: Finance

A pharmaceutical company will spend $1,500,000 each year for 3 years to develop a new drug...

A pharmaceutical company will spend $1,500,000 each year for 3 years to develop a new drug (years 0, 1, 2). After that (starting year 3), they will earn $900,000 in profits per year for 8 years before thepatent runs out. No extra profits after the patent is gone. If future payments are discounted using a 10% interest rate (compounded annually), is this new drug a profitable venture? Should you lease or buy equipment?

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Expert Solution

Since, NPV is negative, you should not buy the machine, and instead lease it.

jeff jeffy answered 2 hours ago
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