You Work for a Pharmaceutical Company That Has Developed a New

question 87

Multiple Choice

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 next 17 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:

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