GlaxoSmithKline Plc is examining the economic feasibility of developing a new medicine. The initial investment in Year
Question:
GlaxoSmithKline Plc is examining the economic feasibility of developing a new medicine. The initial investment in Year 1 is \($500\) million. The investment in Year 2 is
\($200\) million. There is a 50 percent chance that the medicine will be developed and will be successful. If that happens, GlaxoSmithKline must spend another \($100\) million in Year 3, but its income from the project in Year 3 will be \($500\) million, not including the third-year investment. In Years 4, 5, and 6, it will earn \($400\) million a year if the medicine is successful. At the end of Year 6, it intends to sell all rights to the medicine for \($600\) million. If the medicine is unsuccessful, none of GlaxoSmithKline’s investments can be salvaged. Assume that the market return is 12 percent, the risk-free rate is 2 percent, and the beta risk of the project is 2.3. All cash flows occur at the end of each year.
1. Calculate the annual cash flows using the probability of success.
2. Calculate the expected return.
3. Calculate the net present value.
Step by Step Answer:
Investments Principles Of Portfolio And Equity Analysis
ISBN: 9780470915806
1st Edition
Authors: Michael McMillan, Jerald E. Pinto, Wendy L. Pirie, Gerhard Van De Venter, Lawrence E. Kochard