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 = $

Successful test. Further investment. Cash Flows for duration of project Test to Failure Don't test