Why did you raise to power ^2 ? ( [537.300/(1+6%) ^2 ]*5% -25=[537.300/1.1236]*5% -25). Look at the
Fantastic news! We've Found the answer you've been seeking!
Question:
Why did you raise to power ^2 ? ( [537.300/(1+6%)^2]*5% -25=[537.300/1.1236]*5% -25).
Look at the question B again:) (you estimate that it will take 3 years to know) 3 YERAS.
If you invest in R&D, you estimate that it will take 3 years to know whether the drug is successful or not. What is the NPV of the R&D investment?
Please review and explain how you arrived at raise to power ^2
Expert Answer:
The exponent 2 in the formula you provided is incorrect It should not be there The formula calculates the Net Present Value NPV of an RD investment considering the time value of money Heres a breakdown of the correct formula and why the exponent is not needed Present Value PV 537300 1 6 This calculates the present value of the expected future cash flow 5 of the initial investment after three years discounted by the cost of capital 6 Discount Rate 1 6 This represents the time value of money A dollar today is worth more than a dollar in the future so future cash flows need to be discounted to reflect their present value Cash Flow 5 x Initial Investment This represents the expected annual cash inflow from the successful drug assumed to be 5 of the initial investment Initial Investment 537300 This is the initial cost of the RD project Net Present Value NPV PV Initial Investment This subtracts the initial investment from the present value of future cash flows to determine the projects overall profitability The exponent 2 was likely a mistake Its not used in this context to calculate ... View the full answer
Related Book For 
Cost Management Measuring Monitoring and Motivating Performance
ISBN: 978-0470769423
2nd edition
Authors: Leslie G. Eldenburg, Susan K. Wolcott
Posted Date:
