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 $ 3

million in its first year and that this amount will grow at a rate of

6 %6% 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

present value of the new drug = $35,043,694.48
Statement showing Cash flows
Particulars	Time	PVf 10%	Amount	PV
Cash inflows	1.00	0.9091	3,000,000.00	2,727,272.73
Cash inflows	2.00	0.8264	3,180,000.00	2,628,099.17
Cash inflows	3.00	0.7513	3,370,800.00	2,532,531.93
Cash inflows	4.00	0.6830	3,573,048.00	2,440,439.86
Cash inflows	5.00	0.6209	3,787,430.88	2,351,696.59
Cash inflows	6.00	0.5645	4,014,676.73	2,266,180.35
Cash inflows	7.00	0.5132	4,255,557.34	2,183,773.79
Cash inflows	8.00	0.4665	4,510,890.78	2,104,363.84
Cash inflows	9.00	0.4241	4,781,544.22	2,027,841.52
Cash inflows	10.00	0.3855	5,068,436.88	1,954,101.83
Cash inflows	11.00	0.3505	5,372,543.09	1,883,043.58
Cash inflows	12.00	0.3186	5,694,895.68	1,814,569.27
Cash inflows	13.00	0.2897	6,036,589.42	1,748,584.93
Cash inflows	14.00	0.2633	6,398,784.78	1,685,000.02
Cash inflows	15.00	0.2394	6,782,711.87	1,623,727.29
Cash inflows	16.00	0.2176	7,189,674.58	1,564,682.67
Cash inflows	17.00	0.1978	7,621,055.05	1,507,785.11
PV of Cash Inflows =PVCI				35,043,694.48