Question: If Debbies Drug Co. chooses to develop a new drug, it expects to receive cash flows of $150,000 in year 3, $300,000 in year 4,

If Debbie’s Drug Co. chooses to develop a new drug, it expects to receive cash flows of $150,000 in year 3, $300,000 in year 4, and $100,000 in year 5. The discount rate is 8%.

a. What is the present value of the expected future cash flows?

b. Assume that this project requires a $400,000 investment today (or else the future cash flows will not happen). Should the firm make this investment?

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