Use the Information for the Question(s)below

question 20

Multiple Choice

Use the information for the question(s) below.
Assume that you are 30 years old today and that you are planning on retirement at age 65.Your current salary is $45,000 and you expect your salary to increase at a rate of 5% per year as long as you work.To save for your retirement,you plan on making annual contributions to a retirement account.Your first contribution will be made on your 31st birthday and will be 8% of this year's salary.Likewise,you expect to deposit 8% of your salary each year until you reach age 65.Assume that the rate of interest is 7%.
-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 will produce cash flows of $10 million in its first year and that this amount will grow at a rate of 4% per year for the following 16 years.Once the patent expires,other pharmaceutical companies will be able to produce generic equivalents of your drug and competition will drive any future profits to zero.If the interest rate is 12% per year,then the present value of producing this drug is closest to:

• A)$71 million.
• B)$90 million.
• C)$170 million.
• D)$105 million.

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Definitions:

Labor-Hour

The unit of measure representing the amount of work performed by an employee in one hour.

Fixed Manufacturing Overhead

Costs that do not vary with the level of production, such as rent, salaries, and insurance, associated with the manufacturing process.

Volume Variance

A measure in managerial accounting identifying the difference between planned and actual production volumes and its impact on the budget.

Unfavorable

Refers to an outcome or condition that is disadvantageous or against the interests of a person or entity.