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Acron is a large drug company. At the current time, the beginning of year 0, Acron is trying to decide whether one of its new drugs, Niagra, is worth pursuing. Niagra is in the final stages of development and will be ready to enter the market in year 1. The final cost of development, to be incurred at the beginning of year 1, is $9.3million.

Acron estimates that the demand for Niagra will gradually grow and then decline over its useful lifetime of 20 years. Specifically, the company expects its gross margin (revenue minus cost) to be $1.2million in year 1, then to increase at an annual rate of 10% through year 8, and finally to decrease at an annual rate of 5% through year 20. Acron wants to develop a spreadsheet model of its 0 years cash flows, assuming its cash flows, other than the initial development cost, are incurred at the ends of the respective years. Using an annual discount rate of 12% for the purpose of calculating NPV, the drug company wants to answer the following questions:

1. Modify Acron`s model so that development lasts for an extra year. Specifically, assume that development costs of $7.2million and $2.1million are incurred at the beginnings of years 1 and 2, and then the sales in the current model occur one year later, that is, from year 2 until year 21. Again, calculate the NPV discounted back to the beginning of year 1, and perform the same sensitivity analyses. Comment on the effects of this change in timing.
2. Modify Acron`s model so that sales increase, then stay steady, and finally decrease. Specifically, assume that the gross margin is $1.2million in year 1, then increases by 10% annually through year 6, then stays constant through year 10, and finally decreases by 5% annually through year 20. Perform a sensitivity analysis with a two-way data table to see how NPV varies with the length of the increase period (currently 6 years) and the length of the constant period(currently 4 years). Comment on whether Acron should pursue the drug, given your results.
3. Create a one-way data table in the Acron model to see how the NPV varies with discount rate, which is allowed to vary from 8% to 18% in increments of 0.5%. Explain intuitively why the results go in the direction they go- that is, the NPV decreases as the discount rate increases. Should Acron Pursue the drug for all of these discount rates?