Thanks! Imagine you value the following pharmaceutical project: Initial Costs =

Question

Thanks!

Imagine you value the following pharmaceutical project: Initial Costs = $500 mil. (to be paid at T = 0) Project Benefits = $100 mil EVERY year for die next 12 years (assume the cash flows will be generated at the end of year 1, year 2 year 12). The WACC of the project = 20% Assume, instead, that the above project is protected by a patent. You will own die right to die patent for the next 7 years, and thus you will have the right to revisit the decision to start the project in EXACTLY 7 years Thanks to the strong patent protection, the combined value of your project benefits will NOT deteriorate during the next 7 years (that is, your project benefits will not "lose dividends''). However, you have to understand that the project benefits are uncertain, and they can change in the future. In fact, die annualized volatility of changes in the cumulative value of project benefits is 35% per year. The initial costs of the project will stay constant at the original $500 mil. for die next 7 years. What is the dollar value of the right to own such a project? If these cash flows were not generated by a pharmaceutical project, but by a water utility industry, this dollar value would be higher, lower or equal?

Explanation / Answer

The dollar value of the project is 1360 Million.

If the cash flows were not generated by a pharmaceutical project, the dollar value would be lower due to not having a strong patent.

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