A pharmaceutical company has spent $200 million to date working on a blood pressure treatment. It has to decide whether to spend another $200 million today to get final approval from the FDA in two years. Once approved, expected profits will be $25 million for the foreseeable future. The firm's cost of capital is 10%.

1.Based on the work below, should the firm proceed?

Value =$25,000,000

.10

= $250,000,000

NPV =$250,000,000

(1 + .10)²

= $206,611,570.25

2.Suppose many doctors do not see any advantage of using the drug over what they currently prescribe for patients and the profit stream is only $20 million per year. Based on the work below, should the firm proceed?

Value =$20,000,000

.10

= $200,000,000

NPV =$200,000,000

(1 + .10)²

⁼ $165,289,256.20

3.Going back to the original information, suppose there is a delay of a year in getting FDA approval. Based on the work below, should the firm proceed?

Value =$25,000,000

.10

= $250,000,000

NPV =$250,000,000

(1 + .10)³

= $187,828,700.23

4.Going back to the original information, how much could the firm spend today and still move forward?