Hansen Pharmaceuticals is considering development of a potential new drug. Testing will cost $15 million today. If the tests are successful, the company will invest $210 million into production and final development starting one year from now. Following that investment, the drug should produce cash flows of $65 million per year for the next 5 years.

a) What is the NPV of this project, assuming the appropriate discount rate is 16% and the initial tests have a 75% chance of success?

NPV =

b) 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 = $