Question

Genetic science is changing the face of medicines and how they are made. Some cancers take on many different forms (e.g., multiple myeloma) as indicated by a person’s gene array. It is estimated that a new medicine will cost $14,000,000 to develop and will have a useful life of 4 years of sales before being replaced by something better. The minimum attractive annual rate of return is 15%.

What equal annual income for each of those 4 years must be earned to justify the new medicine?

Carry all interim calculations to 5 decimal places and then round your final answer to 3 decimal places. Please enter your answer in millions of dollars. The tolerance is ±0.005.

Answer 1

Solution :-

Initial Cost = $14,000,000

Rate of Return = 15%

Now Let Equal annual income for each of those 4 years must be earned to justify the new medicine be X

Now Initial Cost = X * PVAF ( 15% , 4 )

$14,000,000 = X * [ 1 - ( 1 + 0.15 )^-4 ] / 0.15

$2,100,000 = X * 0.42825

X = $4,903,714.922

Therefore Equal annual income for each of those 4 years must be earned to justify the new medicine = $4,903,714.922

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