If Debbies Drug Co. chooses to develop a new drug, it expects to receive cash flows of

Question:

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?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...