You are the financial manager for a medical equipment company. Your company has

Question

You are the financial manager for a medical equipment company. Your company has just been awarded a patent on a new medical device. Your company is ready to go into production. 1 he company s management is requiring that the device be profitable in 3 years. All numbers below are millions: Costs of Development to date: $90 Annual Revenues expected: $30 year 1 $90 year 2 $210 year 3 Annual Expenses expected $25 year 1 $45 year 2 $70 year 3 The company has a required rate of return of 7% on this device. Will the product meet managementA s requirement of being profitable in 3 years.

Explanation / Answer

Nothing has been mentioned about the amortization of patent expenses, so no   patent expense has been considered. All Amounts in $ Million Details Year 0 Year 1 Year 2 Year 3 Patent Development cost             (90) Annual revenue expected                30                90         210 Annual Costs Expected              (25)              (45)         (70) Net Revenue               (90)                   5                45         140 PV factor @7% =                  1          0.935          0.873      0.816 PV of Cash flows             (90)                   5                39         114 NPV =               68 As the NPV is positive, the product is   getting profitable in 3 years.

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