A pharmaceutical company has spent $500 million to date working on a blood pressure treatment. It has to decide whether to spend another $500 million today to get final approval from the FDA in two years. Once approved, expected profits will be $50 million per year for the foreseeable future. The firm’s cost of capital is 5%. -Should the firm proceed? (Hint: use the perpetuity formula used to value projects found in the readings to find the value of the profit stream that starts in two years, and then discount that.)

A pharmaceutical company has spent $500 million to date working on a blood pressure treatment. It has to decide whether to spend another $500 million today to get final approval from the FDA in two years. Once approved, expected profits will be $50 million per year for the foreseeable future. The firm’s cost of capital is 5%. -Should the firm proceed? (Hint: use the perpetuity formula used to value projects found in the readings to find the value of the profit stream that starts in two years, and then discount that.)

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

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 3E

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A pharmaceutical company has spent $500 million to date working on a blood pressure treatment. It has to decide whether to spend another $500 million today to get final approval from the FDA in two years. Once approved, expected profits will be $50 million per year for the foreseeable future. The firm’s cost of capital is 5%. Should the firm proceed? (Hint: use the perpetuity formula used to value projects found in the readings to find the value of the profit stream that starts in two years, and then discount that.) 2. Suppose some doctors do not see any advantage of using the drug over what they currently prescribe for patients and the profit stream is only $25 million per year. Should the firm proceed? 3. Going back to the original information, suppose there is a delay of a year in getting FDA approval. Should the firm proceed? 4. Going back to the original information, suppose the firm’s’ cost of capital is 10%. Should the firm proceed?
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