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Determining the appropriate discount rate

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A company has only one Asset a patent on a drug. the drug is still undergoing clinical trials and the outcome of these trials will become known next year. At that time the company will be able to decide whether to invest 60 million to produce and distribute the drug. If the drug is proven to be highly effective, it will generate its first annual after-tax profit of 15 million at t=2. and after that future profits will grow at an annual rate of 4%. But if the drug is proven to be only somewhat effective, the first annual after-tax profit at t=2 will be only 5 million and will stay at that level forever. The probability that the drug will be proven to be highly effective is 50% and the probability that the drug will be proved to be only somewhat effective is also 50%. Assume that the appropriate discount rate to discount all future cash flows is 10%

What is the value of this company today T=0

120, 86.4, 118, 0, 36.4, 53.6, 81.8, 40.9

What would your answer to part 1 if instead of 60 million the required investment to produce the drug was only 20 million?

127.3,1400, 100, 93.6, 118.2, 133.3, 104.5, 76.4

Reference no: EM133275780

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