LiveForever Biotechnology Corp: Net Present Value calculations
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LiveForever Biotechnology Corporation (LFBC) has a new potential drug developed by their research group for which they are planning the marketing. The plan has three steps: 1) development (gaining approvals and designing processes and packaging), 2) marketing as a proprietary drug (no direct competitors) and 3) marketing as a generic drug. Step 1 is envisioned as happening in 2010, step 2 in years 2011-2015, and step 3 as years 2016 to 2018. The tables below lists the relevant costs and sales forecast. Depreciation will be computed as straight line from 2011 through 2015.
As an alternative, they could sell the rights to the product to a major pharmaceutical company. Based on this information, what would be the minimum price for which they sell considering past investments and future gains (e.g. the net present value today)?
Present value (in 2010) of past research costs $100 million
Development (approvals and processes) $10 million (assume that this can not be included in depreciation)
COGS (proprietary period) 15% of revenues
COGS (generic period) 5% of revenues
Machinery Investment $2 million in 2010
Machinery Salvage Value $0.0
Inventory 10% of revenues
Accounts receivable 15% of revenues
Accounts Payable 12% of revenues
Cost of capital 8%
Tax Rate 30%
2010 2011 2012 2013 2014 2015 2016 2017 2018
Sales Revenue Forecast $0.00 $50.00 $75.00 $125.00 $400.00 $400.00 $150.00 $100.00 $50.00
SG&A $8.00 $5.00 $5.00 $3.00 $1.00 $1.00 $1.00 $1.00
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The expert examines LiveForever Biotechnology Corporation for the new present value calculations.
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