You work for a pharmaceutical company that has developed a new vaccine. The patent on the vaccine will last 15 years. You expect that the drug's profits will be $2 million in its first year and that the profit will grow at a rate of 5% per year for the next 15 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely reduce growth to 1% per year. a. What is the present value of the new drug if the cost of capital is 8%? b. What is the drug's present value if competition causes the company to have negative growth of -5% (i.e., minus 5%) after the first 15 years?

You work for a pharmaceutical company that has developed a new vaccine. The patent on the vaccine will last 15 years. You expect that the drug's profits will be $2 million in its first year and that the profit will grow at a rate of 5% per year for the next 15 years. Once the patent expires, other pharmaceutical companies will be able to produce the same drug and competition will likely reduce growth to 1% per year. a. What is the present value of the new drug if the cost of capital is 8%? b. What is the drug's present value if competition causes the company to have negative growth of -5% (i.e., minus 5%) after the first 15 years?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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