Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A project with an up-front cost at t = 0 of $1500 is being considered by Nationwide Pharmaceutical Corporation (NPC). (All dollars in this problem

A project with an up-front cost at t = 0 of $1500 is being considered by Nationwide Pharmaceutical Corporation (NPC). (All dollars in this problem are in thousands.) The project's subsequent cash flows are critically dependent on whether a competitor's product is approved by the Food and Drug Administration. If the FDA rejects the competitive product, NPC's product will have high sales and cash flows, but if the competitive product is approved, that will negatively impact NPC. There is a 75% chance that the competitive product will be rejected, in which case NPC's expected cash flows will be $500 at the end of each of the next seven years (t = 1 to 7). There is a 25% chance that the competitor's product will be approved, in which case the expected cash flows will be only $25 at the end of each of the next seven years (t = 1 to 7). NPC will know for sure one year from today whether the competitor's product has been approved.

NPC will proceed with the investment today to take advantage of the untapped market potential and at the end of the projects life, after finding out about the FDA,s decision about the demand for competitors product, they will decide wether or not to renew the patent and return the project. The project return's up-front cost (at t=7) will remain at $1,500, and the subsequent cash flows will remain unchanged and will be recieved for seven additional years (t=8...14). They will only return the project if the return of the project adds value.

Assuming that all cash flows are discounted at 10%, what is the NPV of the project with and without growth option?

715 sould be the answer

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Innovation In Public Transport Finance

Authors: Shishir Mathur

1st Edition

1138250139, 978-1138250130

More Books

Students also viewed these Finance questions