You are the CFO of a drug company, and you must decide whether to invest 70M dollars
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Question:
You are the CFO of a drug company, and you must decide whether to invest 70M dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 10% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 1.5 billion dollars. The drug will likely generate annual profits of 300 million for 10 years until the patent expires. After that, it will generate a cash flow in perpetuity equal to 30 million. The discount rate is 10%.
If you invest in R&D, you estimate that it will take 2 years to know whether the drug is successful or not. What is the NPV of the R&D investment?
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