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You work for a pharmaceutical company that has developed a new drug. The patent on the...

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Finance

You work for a pharmaceutical company that has developed a newdrug. The patent on the drug will last 17 years. You expect thatthe​ drug's profits will be $1 million in its first year and thatthis amount will grow at a rate of 2% per year for the next 17years. Once the patent​ expires, other pharmaceutical companieswill be able to produce the same drug and competition will likelydrive profits to zero. What is the present value of the new drug ifthe interest rate is 9% per​ year?

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4.1 Ratings (770 Votes)
Solution The formula for calculating the present value of a growing annuity is PV A r g 1 1 g 1 r n Where A Annual profits or Annuity r rate of interest g growth rate    See Answer
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