Millennium Laboratories can license one of its patented pharmaceutical products to a Japanese company for a five-year period. Millennium would like to insure that the fee it charges to the Japanese company will return no less than what the company projects it could have made had it marketed the product itself. Millennium believes it could have achieved a minimum of $400,000 in the first year, $10,500,000 in the second year, and $50 million, $65 million and $65 million at the end of each year. Given that interest rates are at 9%, what up-front fee paid immediately should Millennium charge?

Question

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To find the correct up-front fee, we need to calculate the present value of the projected earnings Millennium could have made, discounted at the given interest rate of 9%. The formula for present value (PV) is:$$ PV = \frac{FV}{(1 + r)^n} $$where $FV$ is the future value, $r$ is the interest rate, and $n$ is the number of years in the future the payment is received.For each year's projected earnings, we calculate the present value and sum them up:1. Year 1: $400,000 / (1 + 0.09)^1 = $366,9722. Year 2: $10,500,000 / (1 + 0.09)^2 = $8,812,2273. Year 3: $50,000,000 / (1 + 0.09)^3 = $38,251,7364. Year 4: $65,000,000 / (1 + 0.09)^4 = $47,085,0815. Year 5: $65,000,000 / (1 + 0.09)^5 = $43,161,984Adding these up gives the total present value:$$ PV_{total} = \$366,972 + \$8,812,227 + \$38,251,736 + \$47,085,081 + \$43,161,984 = \$137,677,000 $$The closest option to this calculated value is:B) $136,107,000This is a simplified explanation and the actual calculation might involve more precise figures or rounding, but option B is the closest to the correct answer based on the given method.

Millennium Laboratories Can License One of Its Patented Pharmaceutical Products