Answer: The present value of the new drug is $19.33 million
We follow these steps to arrive at the answer:
Expected Revenues from the drug in year 1(P) $2 million
Growth Rate (g) 2% p.a.
No. of years (n) 17 years
Discount rate (r) 9% p.a.
Since the revenues are expected to grow at a constant rate of 2% p.a, we can treat this series of cash flows as a <u>growing annuity. </u>
We calculate the Present Value of a growing annuity with the following formula:
Substituting the values we get,