Answer:
NPV= $2,149,397.39
Explanation:
Giving the following information:
The development will require an initial investment of $10 million now. Beginning one year from now, the drug will generate annual profits of $4 million for three years. Interest rate is 12%
To calculate if it is convenient or not to make the investment we need to calculate the net present value. If it is positive, the investment will generate value for the company.
NPV= -Io + ∑[Cf/(1+i)^n]
Cf= cash flow
Io= initial investment
For example:
Year 2= 4,000,000/(1.12^2)= 3,188,775.51
year 4= 4,000,000/1.12^4= 2,542,072.31
NPV= 2,149,397.39
It is convenient to invest.
The net present value of a project is the present value of after-tax cash flows from an investment subtracted from the amount invested in the project.
Net present value = sum of the discounted cash flows - cost of the asset
Discounted year 1 cash flow: $4 million / 1.12 = $3.57 million
Discounted year 2 cash flow: $4 million / 1.12² = $3.19 million
Discounted year 3 cash flow: $4 million / 1.12³ = $2.85 million
Sum of the discounted cash flows = $9.61 million
Net present value = $9.61 million - 10 million = $-0.39 million
To learn more about net present value, please check: https://brainly.com/question/13739943?referrer=searchResults
