Question: A pharmaceutical company needs to estimate the maximum amount to spend on R&D for a new type of diet drug. It is estimated that three

A pharmaceutical company needs to estimate the maximum amount to spend on R&D for a new type of diet drug. It is estimated that three years of R&D spending will be required to develop and test market the drug. After the initial three years, an investment in manufacturing and production will be required in year 4. It is estimated today that net cash inflows for six years will be received from sales of the drug. Figure PI3.19 is a cash flow diagram summarizing the firm's estimates.
Assuming a of 12%, a = 50%, and a risk-free interest rate of 6%, determine whether or not the required spending on R&D for this diet drug can be justified.
Figure PI3.19

25 20 20 15 15 10 0 2 10 Manufacturing and Distribution R&D Expenses 80

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