You are the CFO of a large, Danish company that produces and sells medicine. You are appointed by the board of directors to serve the shareholders interest. As the CFO, you are considering to invest in the development of a new drug called Lifesaver. The cost of developing the drug is DKK 5,000,000 in present value terms. It will take ten years for the drug to be developed. There is only a 30% chance that the drug will work and be approved. If it does not work, it will not generate any profits. If it works, it will generate DKK 3,000,000 per year for 10 years, after which the patent to the drug will expire and it will become impossible to make a profit on the drug (that is, the patent will allow you to make money on the drug in years 11- 20). The discount rate is 8%.

a. What is the NPV of investing in the drug? Should you make the investment?

b. A friend of yours argues that your NPV analysis is unnecessary: you should make the investment regardless of whether it is profitable for your firm or not, because it might still help save peoples lives, which is ultimately more important than money. What would you tell him/her?