I am having trouble with part 2 of this problem the shell.. Could you help explain how we get a net income 11M in part 2 when we receive 12M in income but only expense 11M in expense? All i need is an explanation of how I can come up with it or the formula, I am not trying to plagurize

DURA wishes to spend $9 million dollars to research a set of exploratory drugs. The initial research program will last 3 years, followed by 1 year field trials (the field trials will cost $2M). Upon completion of the field trials technological feasibility will be determined.Due to the fast changing nature of the drug industry, the successful drugs emerging from this process are expected to generate revenue for no more than 3 years after their initial introduction. Dura is considering the following approaches for conducting this research endeavor.

2.Shell: Dura organizes Spell company to fund the research. Dura invests $3,000,000 in Spell and outside investors contribute capital of $9,000,000. While Dura controls Spell, it is Spell company that employs Dura to perform the drug research (Dura expends $3 million per year in this effort, and Spell pays Dura $4 million/year for performing the research). Upon completion of the research effort ownership of the in-process drug knowledge, patents and rights will belong to Spell. Dura plans or reacquiring the 75% of Spell it does not own for $9,000,000 at the start of year 4. (In actuality there would be return to capital issues to the outside investors, but we are ignoring these for simplicity. They basically would come into play under both alternatives with similar consequences.)

Overall, the life of this research effort is 7 years, 3 years of initial development, 1 year of trials, and 3 years of sales.

QUESTIONS (Hint: The LAW holds here. The total net impact of each option should amount to $11M of expense, the cost of performing the R&D research over years 1-4.

Again ignoring any revenue earned from the sale of drugs, what is the income impact by year on Dura if it employs the Spell option assuming that year 1 is 2001:

Year 1 2 3 4 5-7 total

Revenue from 0M

Spell work

R&D Exp/writeoffs 3M

Net expense 11M

(Income)