AbbVie Pharmaceuticals (headquartered in Lake Forest, IL) has commenced a $80 million R&D project to develop a new drug to treat a rare disease. So far, it has spent $25 million of the $80 million, and preliminary results are positive. If the remaining $55 million is invested, the drug will certainly be completed and is expected to generate profit1 of $100 million (in present value) for AbbVie. Meanwhile, a research biologist at Northwestern has independently developed a treatment for the same disease. The scientist has offered to sell her invention to AbbVie for $2 million. Her drug would be just as effective as AbbVie’s drug, and would also generate profit of $18 million in present value.

Required:
a. Should AbbVie buy the drug for $2 million?
b. What is the most AbbVie should be willing to pay for the Illinois Tech researcher’s drug?
c. How would your answer change if the Illinois Tech biologist had developed her drug two years ago, before AbbVie started its own R&D project?
d. Suppose that Merck has also expressed interest in the biologist’s invention. If Merck buys the drug, there is a 50% chance that it will beat AbbVie’s drug to market. If that happens, suppose the profit of the second drug to market is zero. Now how much should AbbVie be willing to pay for the drug? How much should Merck be willing to pay?

Answers

Answer 1

Question Completion:

AbbVie Pharmaceuticals (headquartered in Lake Forest, IL) has commenced a $10 million R&D project to develop a new drug to treat a rare disease. So far, it has spent $6 million of the $10 million, and preliminary results are positive. If the additional $4 million is invested, the drug will certainly be completed and is expected to generate profit of $18 million in present value for AbbVie. Meanwhile, a research biologist at Illinois Tech has independently developed a treatment for the same disease. The scientist has offered to sell her invention to AbbVie for $2 million. Her drug would be just as effective as AbbVie’s drug, and would also generate profit of $18 million in present value.

Answer:

AbbVie Pharmaceuticals

a. AbbVie should buy the drug for $2 million.

b. The most AbbVie should be willing to pay for the Illinois Tech researcher's drug is $4 million.  Luckily, this much is not demanded by the researcher.

c. If the Illinois Tech biologist had developed her drug two years ago, before AbbVie started its own R&D project, AbbVie could have paid an amount ranging from $2 million to $10 million.

d. Before Merck buys the drug, AbbVie should be willing to pay $2 million without further delays.

e. Merck should be willing to pay as much as $4 million.

Explanation:

a) Note that the introduction to the question was flawed.  The mathematics do not add up.  For this reason, I have worked with the more properly formulated question as shown in the Question Completion above.

b) Data and Calculations:

Projected cost of R&D = $10 million

Amount of the R&D cost spent already = $6 million

Remaining R&D cost to be spent = $4 million

Expected profit = $18 million

Cost of the offer by the research biologist = $2 million

Expected profit from the biologist's drug = $18 million

c) The conclusions above were reached because all the amounts are stated in present value terms.


Related Questions

During the month of March, Munster Company's employees earned wages of $64,000. Withholdings related to these wages were $4,896 for FICA, $7,500 for federal income tax, $3,100 for state income tax, and $400 for union dues. The company incurred no cost related to these earnings for federal unemployment tax but incurred $700 for state unemployment tax. Journalize payroll entries.

Answers

Answer:

A. Dr salaries and wages expense for 64,000

Cr to FICA taxes payable for 4,896

Cr Federal Income Tax Payable for 7,500

Cr State Income Tax Payable for 3,100

Cr Union Dues Payable for 400

Cr Salaries and Wages Payable for 48,104

B. Dr payroll tax expense for 5,596

Cr FICA tax payable for 4,896

Cr State Unemployment for 700

Explanation:

Preparation to Journalize the payroll entries

A. Dr salaries and wages expense for 64,000

Cr to FICA taxes payable for 4,896

Cr Federal Income Tax Payable for 7,500

Cr State Income Tax Payable for 3,100

Cr Union Dues Payable for 400

Cr Salaries and Wages Payable for 48,104

(64,000-4,896-7,500-3,100-400)

B. Dr payroll tax expense for 5,596

(4,896+700)

Cr FICA tax payable for 4,896

Cr State Unemployment for 700

A fierce debate exists between policymakers as to whether or not they should use monetary and fiscal policies to stabilize small fluctuations in the economy. Please determine which of the given statements could be used to support using policy to stabilize the economy and which might be used against such choices. In favor of using policy Not in favor of using policy

Answers

Answer:

Hello the options related to your question is missing attached below are the missing options

answer :

In favor of using policy

Fiscal policy can be used to cut spending and rein in excessive aggregate demand. This controls inflationPolicy makers can expand the money supply in order to increase aggregate demand

Not in favor of using policy

Fiscal policy, in particular is subject to long delays in the political process, which can affect its usefulnessMonetary and fiscal policy only take effect after a long lagBecause of the imprecision of economic forecasting, policy makers may end up causing more harm to the economy than good

Explanation:

Fiscal policy is simply the use of government, taxing and spending policy to influence the economic conditions of the country positively over time. and it can come in either ways. i.e. increase in government spending or lowering taxes by the government

In favor of using policy

Fiscal policy can be used to cut spending and rein in excessive aggregate demand. This controls inflationPolicy makers can expand the money supply in order to increase aggregate demand

Not in favor of using policy

Fiscal policy, in particular is subject to long delays in the political process, which can affect its usefulnessMonetary and fiscal policy only take effect after a long lagBecause of the imprecision of economic forecasting, policy makers may end up causing more harm to the economy than good

Haste Enterprises issues 20-year, $1,000,000 bonds that pay semiannual interest of $50,000. If the effective annual rate of interest is 11%, what is the issue price of the bonds? Some relevant and irrelevant present value factors: * PV of ordinary annuity of $1: n = 20; i = 11% is 7.96333 **PV of $1: n = 20; i = 11% is 0.12403 * PV of ordinary annuity of $1: n = 40; i = 5.5% is 16.04612 **PV of $1: n = 40; i = 5.5% is 0.11746 Multiple Choice $1,000,000. $919,766. $1,802,306. $992,948.

Answers

Answer: $919,766

Explanation:

The Present Value of issuance price of a bond is:

= Present value of interest payments + Present Value of par value at maturity

Present value of interest payments:

The payments are constant so this is an annuity.

Payments are semi annual so the variables should be adjusted for this.

Interest = 11%/2 = 5.5%

Number of periods = 20 * 2 = 40 semi annual periods.

Present value = Annuity * Present value of annuity factor, 5.5%, 40 periods

= 50,000 * 16.04612

= $802,306

Present value of par at maturity:

= Par value * discount factor, 5.5%, 40 years

= 1,000,000 * 0.11746

= $117,460

Issue price of bond:

= 802,306 + 117,460

= $919,766

what is the meaning of life​

Answers

Answer:

To be totally honest... I cant tell you. All I know so far is that you are born to die

Explanation:

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