AstraZeneca is developing a vaccine to combat COVID19. It expects the first cash inflow from this...

AstraZeneca is developing a vaccine to combat COVID19. It expects the first cash inflow from this project to be $525,000 in 6 years’ time and then an inflow will occur every half a year for the next five years. The success of this project results in an expectation of the cash inflows growing at a rate of 11.32% p.a. compounded annually. After the patent on this vaccination expires, the long-term growth rate will drop to zero and the cash inflows will cease. If AstraZeneca requires a return of 16.48% p.a. compounded annually, what is the maximum amount of money they could put into developing this vaccine for it to be worthwhile?

Expert Solution

Semi annual rate equivalent to growth rate of 13.42% compounded annually =

(1+13.42%)^(1/2)-1= 6.498826%

Semi annual rate equivalent to rate of return of 16.48% compounded annually =

(1+16.48%)^(1/2)-1= 7.925901%

Cash inflows as stated constitute a growing annuity due of $525,000, semi annual, for 5 years, starting 6 years from now.

Maximum amount that can be invested now is the PV of this annuity, further discounted for 6 years = $ 1,981,320.03

Calculation as follows:

jeff jeffy answered 1 year ago

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