Akba Pharma has just completed the laboratory research on a new drug which is expected to cure boredom. So far, $100 million has been spent on research and development.

Before the investment in plant, the drug will now be tried on volunteers. This phase will cost a further $200 million. The chances of a positive result from this phase are 50%. If the results are positive, Akba will receive a patent and will start producing the drug in a new factory. If the results are negative Akba will terminate the project and will not make the investment in plant.

The cost of investment in the new factory is $500 million. The factory investment will be depreciated over 5years to a book value of zero. The patent of the boredom drug will expire after 5 years. After the patent expires, the production of the drug will no longer be profitable for Akba and production will be stopped. The factory however will be sold for $100 million.

Variable production costs are expected to be 20% of sales. Working capital required for each year is expected to be 20% of next years revenues. Akba Pharma expects the following sales revenues from the boredom new drug.

	Revenues ($million)
Year1	300
Year2	500
Year3	700
Year4	700
Year5	500

The tax rate for Akba Pharma is 30%. The cost of capital for this project is 15%.

Please show all your work. (You can submit an excel file or an image if you work on paper)

Describe how you would treat the cost of $200 million of product testing on volunteers.