Question

You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last for 17 years. You expect that the drug's profits will be 4 million in its first year and that this amount will grow at a rate of 6% per year for the next 16 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely drive profits to zero. I f the interest rate is 10% per year,  the present value of the new drug is ____ million.

(Please write numbers only, no "$", no ",", no "million",  round to two decimal places.  i.e. write  $1,234,567 as 1.23 )

Answer 1

Present value of growinhg annuity = [Payments / (required rate - growth rate)] * {[1 - (1 + g) / (1 + r)]^n}

Present value of growing annuity = [4 / (0.1 - 0.06)] * {[1 - (1 + 0.06) / (1 + 0.1)]^16}

Present value of growing annuity = [4 / 0.04] * {1 - 0.552855}

Present value of growing annuity = 100 * 0.447145

Present value of growing annuity = $44.71 million