You work for a pharmaceutical company that has developed a new vaccine. The patenton the vaccine will last 15 years. You expect that the drug’s profits will be $2 million in itsfirst year and that the profit will grow at a rate of 5% per year for the next 15 years. Oncethe patent expires, other pharmaceutical companies will be able to produce the same drugand competition will likely reduce growth to 1% per year. a. What is the present value of the new drug if the cost of capital is 8%? b. What is the drug’s present value if competition causes the company to havenegative growth of -5% (i.e., minus 5%) after the first 15 years?
You work for a pharmaceutical company that has developed a new vaccine. The patenton the vaccine will last 15 years. You expect that the drug’s profits will be $2 million in itsfirst year and that the profit will grow at a rate of 5% per year for the next 15 years. Oncethe patent expires, other pharmaceutical companies will be able to produce the same drugand competition will likely reduce growth to 1% per year. a. What is the present value of the new drug if the cost of capital is 8%? b. What is the drug’s present value if competition causes the company to havenegative growth of -5% (i.e., minus 5%) after the first 15 years?
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter2: Fundamental Economic Concepts
Section: Chapter Questions
Problem 4E
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You work for a pharmaceutical company that has developed a new vaccine. The patenton the vaccine will last 15 years. You expect that the drug’s profits will be $2 million in itsfirst year and that the profit will grow at a rate of 5% per year for the next 15 years. Oncethe patent expires, other pharmaceutical companies will be able to produce the same drugand competition will likely reduce growth to 1% per year.
a. What is the present value of the new drug if the cost of capital is 8%?
b. What is the drug’s present value if competition causes the company to havenegative growth of -5% (i.e., minus 5%) after the first 15 years?
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