FIN360 Business Finance Fall 2018 Homework: Chapter 4 Homework Save Score: 0 of
ID: 2808236 • Letter: F
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FIN360 Business Finance Fall 2018 Homework: Chapter 4 Homework Save Score: 0 of 1 pt 10 of 14 (7 complete) IW Score: 28.57%, 6 of P 4-29 (similar to) Question Help 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 1 7 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 eOf the new drug if the interest rate is 12%per year? The present value of the new drug is smilion. (Round to three decimal places.) $2 $39 Enter your answer in the answer box and then click Check AnswerExplanation / Answer
This is a 17-year growing annuity. So, we can find out the NPV using the growing annuity formula:-
NPV = P/r-g [(1-(1+g)/(1+r)^n)]
= 5,000,000/(0.12-0.05) [(1-(1+0.05)/(1+0.12)^17)]
= $47,584,321.62
= $47.584 million
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