You are evaluating to make an investment in a small biotechstart-up which will require an...

You are evaluating to make an investment in a small biotech start-up which will require an investment of $1.4 million. The start-up is expecting to generate free cash flows of $200,000 during the first year.

After one year, the insurance companies will decide if the start-up’s drug will be cover in their plans or not. If they decide to not cover the drug, the company will be able to generate free cash flows of $400,000 during the next 12 years (the period of the patent) and zero after that. If the insurance companies decide to cover the drug, the start-up will be able to generate free cash flows of $800,000 during the next 12 years (the period of the patent) and zero after that.

Furthermore, the start-up can also decide to sell the patent to a larger biotech company for $2.5 million after knowing the answer of the insurance companies (end of year 1), whether they cover it or not. You expect that the insurance companies will approve the drug with a 70% probability and you require a 20% return.

What is the NPV of the investment?”

Solutions

Expert Solution

As seen from above calculation we have Alternative (Alt - 1 and Alt - 2). So our choice is Alt - 2 if drug is not approved.

It had a probability of 30%.

So Expected NPV of this project = 550,000 30% + 1426144 70% = $1,163,301 .............. Option - e

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

You are evaluating to make an investment in a small biotech start-up which will require an...

You are evaluating to make an investment in a small biotech start-up which will require an investment of $1.7 million. The start-up is expecting to generate free cash flows of $200,000 during the first year. After one year, the insurance companies will decide if the start-up’s drug will be cover in their plans or not. If they decide to not cover the drug, the company will be able to generate free cash flows of $400,000 during the next 12 years...

You are evaluating to make an investment in a small biotech start-up which will require an...

You are evaluating to make an investment in a small biotech start-up which will require an investment of $2.1 million. The start-up is expecting to generate free cash flows of $200,000 during the first year. After one year, the insurance companies will decide if the start-up’s drug will be cover in their plans or not. If they decide to not cover the drug, the company will be able to generate free cash flows of $400,000 during the next 12 years...

You are evaluating to make an investment in a small biotech start-up which will require an...

You are evaluating to make an investment in a small biotech start-up which will require an investment of $2.1 million. The start-up is expecting to generate free cash flows of $200,000 during the first year. After one year, the insurance companies will decide if the start-up’s drug will be covered in their plans or not. If they decide to not cover the drug, the company will be able to generate free cash flows of $400,000 during the next 12 years...

Better Health, Inc. is evaluating two investment projects, which require up-front expenditures of $1.0 and 1.2...

Better Health, Inc. is evaluating two investment projects, which require up-front expenditures of $1.0 and 1.2 million, respectively. The projects are expected to produce the following net cash inflows. Year Project A Project B 0 -$1,000,000 -$1,200,000 1 $500,000 $800,000 2 $400,000 $600,000 3 $350,000 $300,000 a. What is each project's IRR? b. What is each project's NPV if the cost of capital is 10 percent? c. Which project is more beneficial to Better Health? Please show your work.

You are evaluating a mining project that will require an initial investment outlay (time 0) of...

You are evaluating a mining project that will require an initial investment outlay (time 0) of $700,000. The project will generate cash flows of $200,000 in Year 1, $300,000 in Year 2, and $400,000 in Year 3. There are no cash flows beyond Year 3. Show work in excel A. What is the NPV of the project at a discount rate of 10%? Explain calculations. B. What is the IRR of the project? Explain calculations. C. Should you invest in...

Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 200,000...

Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 200,000 dollars and that is expected to last for 6 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 40 percent, 33 percent, 19 percent, and 8 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 346,000 dollars and relevant, incremental annual costs associated...

1) Fairfax Pizza is evaluating a project that would require an initial investment in equipment of...

1) Fairfax Pizza is evaluating a project that would require an initial investment in equipment of 300,000 dollars and that is expected to last for 6 years. MACRS depreciation would be used where the depreciation rates in years 1, 2, 3, and 4 are 40 percent, 34 percent, 18 percent, and 8 percent, respectively. For each year of the project, Fairfax Pizza expects relevant, incremental annual revenue associated with the project to be 567,000 dollars and relevant, incremental annual costs...

14.2 Better Health, Inc is a evaluating two investment projects, each of which requires an up-front...

14.2 Better Health, Inc is a evaluating two investment projects, each of which requires an up-front expenditure of $1.5 million. The projects are expected to produce the following net cash inflows: Project A Project B Year $500,000 $2,000,00 1 1,000,000 1,000,000 2 2,000,000 600,000 3 ($1,500,000) a. What is each project's IRR? b. What is each project's NPV if the cost of capital is 10 percent? 5 percent? 15 percent?

Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of...

Better Health, Inc. is evaluating two investment projects, each of which requires an up-front expenditure of $2.5 million. The projects are expected to produce the following net cash inflows: Year Project A Project B 0 -$2,500,000 -$2,500,000 1 $500,000 $1,200,000 2 $1,100,000 $1,300,000 3 $1,400,000 $800,000 a. What is each project's IRR? b. What is each project's NPV if the cost of capital is 10 percent? c. Which one would you buy? Please include the input used in a financial...

Subjects