You work for a pharmaceutical company that has developed a new vaccine. The patent

on the vaccine will last 15 years. You expect that the drugs profits will be $2 million in its

first year and that the profit will grow at a rate of 5% per year for the next 15 years. Once

the patent expires, other pharmaceutical companies will be able to produce the same drug

and competition will likely reduce growth to 1% per year.

a. What is the present value of the new drug if the cost of capital is 8%?

b. What is the drugs present value if competition causes the company to have

negative growth of -5% (i.e., minus 5%) after the first 15 years?