A pharmaceutical company is developing a new drug . This requires an initial investment of $5 million, followed by payments of $1 million a year paid continuously over the next 5 years. Thereafter, the drug is expected to generate annual payments of $2 million in perpetuity, with the first payment being made at the start of the 6th year .

a. What is the internal rate of return for this project?

b. What is the net present value of this project calculated using an effective annual interest rate of 12%, if the payments generated start at $2 million at the start of year 6 but, because of inflation, all future payments are 5% higher than the preceding one?