You are the CFO of a drug company, and you must decide whether to invest $15M$ dollars in R&D for a new drug.

If you conduct the R&D$,$ you believe that there is a $10\%$ chance that the research will produce a useful drug.

If the research is successful, investment in the drug will require an outlay of $400$ million dollars.

The drug will likely generate annual profits of $90$ million for $10$ years $($starting a year after the $400$ million dollar outlay$).$

After that, it will generate a cash flow equal to $7$ million a year in perpetuity $($no growth$).$ The discount rate is $10\%.$

a$)$ If the research is successful, what is the net present value of the drug cash flows at the time of the $400$ dollar million

outlay? $(10$ points$)$

NPV if successful $=$

b$)$ If you invest in R&D$,$ you estimate that it will take $4$ years to know whether the drug is successful or not.

What is the NPV of the R&D investment? $(10$ points$)$

NPVR&D $=$