Question: Reconsider the R&D example we discussed in class. If you decide to continue the project, you will have to spend an additional $2 million by

Reconsider the R&D example we discussed in class. If you decide to continue the project, you will have to spend an additional $2 million by the end of this year (Year 1). Then there will be a year of waiting (Year 2) before you know if the patent is granted. Assume that the patent will be awarded at the end of Year 2, and you will decide to sell the product directly. Then you will have to invest $5 million in each of Years 3 and 4 (to make up the total investment of $10 million). Your net proceeds from selling the product, then, would be evenly distributed over Years 5 through 7. Assuming an annual interest rate of 14%, what would be the PV of the payoffat the end of Year 7 of the "Medium Demand" branch of the decision tree?

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