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 4 % 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 nbsp 8 % per year?

What is the present value of the new drug? (round to three decimal places)

Answer #1

**Solution:**

The formula for calculating the present value of a growing annuity is

PV = [ A / ( r – g) ] * [ 1 – ( ( 1 + g ) / ( 1 + r ) )
** ^{n}** ]

Where

A = First year profit or Annuity ; r = rate of interest ; g = growth rate ; n = no. of years

PV = Present value of growing annuity

As per the information given in the question we have

A = $ 1,000,000 ; r = 8 % = 0.08 ; g = 4 % = 0.04 ; n = 17 years

Applying the above values in the formula we have

= [ $ 1,000,000 / ( 0.08 – 0.04 ) ] * [ 1 – ( ( 1 + 0.04 ) / ( 1
+ 0.08 ) ) ** ^{17}** ]

= [ $ 1,000,000 / ( 0.08 – 0.04 ) ] * [ 1 – ( ( 1.04 ) / ( 1.08
) ) ** ^{17}** ]

= [ $ 1,000,000 / ( 0.04 ) ] * [ 1 – ( 1.04 / 1.08 )
** ^{17}** ]

= [ $ 1,000,000 / ( 0.04 ) ] * [ 1 – ( 0.962963 )
** ^{17}** ]

= [ $ 1,000,000 / 0.04 ] * [ 1 – 0.526457 ]

= [ $ 1,000,000 / 0.04 ] * [ 0.473543 ]

= $ 25,000,000 * 0.473543

= $ 11,838,574.388652

= $ 11,838,574.389 ( when rounded off to three decimal places )

**Thus the present value of the new drug if the interest
rate is 8 % per year = $ 11,838,574.389**

**Note:** The value of ( 0.962963 )
** ^{17}** is calculated using the
Excel formula =POWER(Number,Power)

=POWER(0.962963,17) = 0.526457

You work for a pharmaceutical company that has developed a new
drug. The patent on the drug will last 1717 years. You expect that
the drug's profits will be $ 4$4 million in its first year and
that this amount will grow at a rate of 5 %5% per year for the next
1717 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...

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 $ 5 million in its first year and that
this amount will grow at a rate of 5 % 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...

2) 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 $4 million in its first year and
that this amount will grow at a rate of 6% 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...

You are the manager of a small pharmaceutical company that
received a patent on
a new drug three years ago. Despite strong sales ($150 million last
year) and a low
marginal cost of producing the product ($0.50 per pill), your
company has yet to show
a profit from selling the drug. This is, in part, due to the fact
that the company spent
$1.7 billion developing the drug and obtaining FDA approval. An
economist has estimated
that, at the current...

You are the manager of a small pharmaceutical company that
received a patent on a new drug three years ago. Despite strong
sales ($225 million last year) and a low marginal cost of producing
the product ($0.70 per pill), your company has yet to show a profit
from selling the drug. This is, in part, due to the fact that the
company spent $1.3 billion developing the drug and obtaining FDA
approval. An economist has estimated that, at the current...

You are the manager of a small pharmaceutical company that
received a patent on a new drug three years ago. Despite strong
sales ($150 million last year) and a low marginal cost of producing
the product ($0.55 per pill), your company has yet to show a profit
from selling the drug. This is, in part, due to the fact that the
company spent $1.6 billion developing the drug and obtaining FDA
approval. An economist has estimated that, at the current...

XYZ Pharmaceutical, Inc. just got FDA approval for their new
drug, Viagrina. The company has never paid a dividend, but they
expect to pay one for the first time by the end of the year. The
expected dividend is $3.00 per share and the company expects that
dividend to increase at a rate of 20% for five years. After that,
XYZ expects to see its dividend growth limited by the growth rate
the US economy, which on average is 4.5%...

Sharpe Pharmaceuticals has developed a new drug called Zantor
that can cure anxiety disorders. Sharpe Pharmaceuticals has a
patent on the production of Zantor. Suppose the demand Zantor is
given by the equation
P=86-1/3000Q and the marginal
revenue is given by the equation
MR=86-1/1500Q. Further suppose
that the marginal cost of producing Zantor is MC=6 and the
average total cost is given by the formula:
ATC=100,000/Q+6
(4 points) Calculate the profit-maximizing
price and quantity.
(4 points) How much profit does...

A pharmaceutical company has developed a drug that is expected
to reduce hunger. To test the drug, three samples of rats are
selected with n=12 in each sample. The first sample receives the
drug every day. The second sample is given the drug once a week,
and the third sample receives no drug at all (the control group).
The dependent variables is the amount of food eaten by each rat
over a 1-month period. These data are analyzed by an...

1.A pharmaceutical company has already spent 1 million dollars
in research for a new drug and now has to make a decision. The
company can either terminate the research program or it can move to
the development phase. If the company moves to the development
phase, it has to invest another 1 million dollars today to start
producing and selling the new drug. However, once the company
begins producing and selling the new drug, it expects to make
150,000 dollars...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 11 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago