The drug company Pfizer is considering whether to invest in the development of a new cancer drug. 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. At an interest rate is 12%, what is the net present value of the investment?

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.