Pfizer is planning to embark on developing a new medicine for the cure of common cold. If undertaken, the project requires $10 million dollar on R&D, every year for 5 years. The medicine will be marketed in Year 6 and net returns are estimated to be $10 million for the next 5 years at the end of which Pfizer plans to sell the formula to its competitor for $1 million. If corporation requires a ROI of 15%, what is the NPV for the project?
A) $16.6 million
B) -$16.6 million
C) $16.85 million
D) -$16.85 million
E) $0.123 million

Question

Quizplus · Accepted Answer

To calculate NPV, we need to find the present value of all cash inflows and outflows. We will discount all cash flows at the required rate of return, which is 15%.

Year 0 (Initial investment): -$10 million
Year 1-5 (R&D expense): -$10 million each year
Year 6-10 (Net returns): $10 million each year
Year 10 (Sale of formula): $1 million

To calculate NPV, we use the formula: NPV = (Cash inflows - Cash outflows) / (1 + r)^t, where r is the required rate of return and t is the time period.

NPV = (-$10 million) / (1 + 0.15)^0 + (-$10 million) / (1 + 0.15)^1 + (-$10 million) / (1 + 0.15)^2 + (-$10 million) / (1 + 0.15)^3 + (-$10 million) / (1 + 0.15)^4 + ($10 million) / (1 + 0.15)^5 + ($10 million) / (1 + 0.15)^6 + ($10 million) / (1 + 0.15)^7 + ($10 million) / (1 + 0.15)^8 + ($10 million) / (1 + 0.15)^9 + ($1 million) / (1 + 0.15)^10

NPV = -$21.662 million

Since the NPV is negative, we should not undertake the project. Therefore, the best choice is B.

Pfizer Is Planning to Embark on Developing a New Medicine