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 $2 million in its first year and that this amount will grow at a rate of 5% 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 10% per year?

Answer 1

Based on the given data, pls find below workings and answer highlighted in bold::

Flows	Year	Discount Factor	Discounted Flows
	0	1.0000	-
20,00,000	1	0.9091	18,18,182
21,00,000	2	0.8264	17,35,537
22,05,000	3	0.7513	16,56,649
23,15,250	4	0.6830	15,81,347
24,31,013	5	0.6209	15,09,467
25,52,563	6	0.5645	14,40,855
26,80,191	7	0.5132	13,75,362
28,14,201	8	0.4665	13,12,845
29,54,911	9	0.4241	12,53,171
31,02,656	10	0.3855	11,96,208
32,57,789	11	0.3505	11,41,835
34,20,679	12	0.3186	10,89,934
35,91,713	13	0.2897	10,40,391
37,71,298	14	0.2633	9,93,101
39,59,863	15	0.2394	9,47,960
41,57,856	16	0.2176	9,04,871
43,65,749	17	0.1978	8,63,740
Present Value			2,18,61,456