Question
In: Economics
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 2 years agoRelated Solutions
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