Hansen Pharmaceuticals is considering

development of a potential new drug. Testing will

cost $$27$ million today. If the tests are successful,

the company will invest $$110$ million into

production and final development starting one

year from now. Following that investment, the

drug should produce cash flows of $$51$ million per

year for the next $11$ years.

What is the NPV of this project, assuming the

appropriate discount rate is $19\%$ and the initial

tests have a $25\%$ chance of success?

$NPV=$$

Suppose Hansen Pharmaceuticals has the option

to sell their research for $$7$ million in the event of

an unsuccessful test. What is the value of this

option to abandon?

Option to Abandon $=$$