Bayer Pharmaceutical has developed a new drug. The patent on the drug will last 20 years. You expect that the drug’s profits will be $4 million in its first year and this amount will grow at a rate of 5% per year for the next 20 years. Once the patent expires, other pharmaceutical companies will able to produce the same drug and competition will drive profits to zero. What is the present value of the new drug if the interest rate is 7% per year?

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We can calculate the present value of the new drugs profits using the concept of perpetuity with gro... View the full answer