Question

29. Merck, Incorporated is working on a new vaccine to protect from Covid-19. Merck will spend $42,000,000 today to develop this vaccine. If the vaccine provides $8,000,000 in positive cash flows every year for 15 years, what is the IRR of this project?

17.31%

18.09%

19.05%

35.00%

28.57%

30. Merck, Incorporated is working on a new vaccine to protect from Covid-19. Merck will spend $42,000,000 today to develop this vaccine. If the vaccine provides $8,000,000 in positive cash flows every year for 15 years and Merck has a WACC of 12%, what is the NPV of this project?

$12.49M

$78.00M

$1.17M

$54.49M

$120.00M

Answer 1

Answer to Question 29:

Initial Investment = $42,000,000
Annual Cash Flow = $8,000,000
Life of Project = 15 years

Let IRR be i%

Net Present Value = -$42,000,000 + $8,000,000/(1+i) + $8,000,000/(1+i)^2 + … + $8,000,000/(1+i)^14 + $8,000,000/(1+i)^15
0 = -$42,000,000 + $8,000,000/(1+i) + $8,000,000/(1+i)^2 + … + $8,000,000/(1+i)^14 + $8,000,000/(1+i)^15

Using financial calculator, i = 17.31%

IRR of the project is 17.31%

Answer to Question 30:

Initial Investment = $42,000,000
Annual Cash Flow = $8,000,000
Life of Project = 15 years
WACC = 12%

Net Present Value = -$42,000,000 + $8,000,000/1.12 + $8,000,000/1.12^2 + … + $8,000,000/1.12^14 + $8,000,000/1.12^15
Net Present Value = -$42,000,000 + $8,000,000 * (1 - (1/1.12)^15) / 0.12
Net Present Value = -$42,000,000 + $8,000,000 * 6.810864
Net Present Value = $12,486,912

NPV of the project is $12.49 million