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7 . You are the CFO of a drug company, and you must decide whether to invest 1 5 M dollars in R&D for a

7. You are the CFO of a drug company, and you must decide whether to invest 15M dollars in R&D for a new drug. If you conduct the R&D, you believe that there is a 10% chance that the research will produce a useful drug. If the research is successful, investment in the drug will require an outlay of 400 million dollars. The drug will likely generate annual profits of 90 million for 10 years (starting a year after the 400 million dollar outlay). After that, it will generate a cash flow equal to 7 million a year in perpetuity (no growth). The discount rate is 10%.

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