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 $ 1 million in its first year and that this amount will grow at a rate of 2 % 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 11 % per​ year?

Answer 1

Years	Profit	Discount factor		Present Value
1	$10,00,000	0.9009		$       9,00,901
2	$10,20,000	0.8116		$       8,27,855
3	$10,40,400	0.7312		$       7,60,732
4	$10,61,208	0.6587		$       6,99,051
5	$10,82,432	0.5935		$       6,42,371
6	$11,04,081	0.5346		$       5,90,287
7	$11,26,162	0.4817		$       5,42,426
8	$11,48,686	0.4339		$       4,98,445
9	$11,71,659	0.3909		$       4,58,031
10	$11,95,093	0.3522		$       4,20,893
11	$12,18,994	0.3173		$       3,86,767
12	$12,43,374	0.2858		$       3,55,407
13	$12,68,242	0.2575		$       3,26,590
14	$12,93,607	0.2320		$       3,00,110
15	$13,19,479	0.2090		$       2,75,777
16	$13,45,868	0.1883		$       2,53,417
17	$13,72,786	0.1696		$       2,32,869
Present Worth				$     84,71,926
Thus, Present value of new drug will be				$     84,71,926