Given : Acron needs to decide whether to pursue the new drug, Niagra, by analyzing its Net Present Value (N

elements are:

1. Initial development cost: $9.3 million (incurred at year 0).

2. Expected revenue Growth : Stsrts at $1.2 M in year 1
Increase at 10% up to 8 year
Declines at 5% from year 9 to year 20
3. Discount rate : 12%

Step 1: PV is often used in finance to determine the value of the future cash flow such as investementor savings ,loan in
The Present Value (PV) formula is used to calculate the current worth of a future amount of money or stream
return.

The formula is:PV=FV/(1+r)^t

Where:
FV: Future value of Cash flow
r: Discount rate
t: no of year

For multiple cash flows over time, the PV is calculated by summing up the present values of all individ
cash flows:

PV = \sum_{t=1}^n \{C_t}{(1 + r)^t}

Step 2: What is Net present value ?

The NPV is the sum of the present value (PV) of all future cash flows (both inflows and outflows).

NPV is used to evaluate the profitability of an investment.

NPV formula : NPV = \sum_{t=1}^n \{C_t}{(1 + r)^t} - C_0NPV=t=1∑n​(1+r)tCt​​−C0​

Where:
Ct​: Cash inflow or outflow at time ttt
r: Discount rate (expressed as a decimal, e.g., 10% = 0.10)
t: Time period (1, 2, 3, ..., nnn)
n: Total number of time periods
C0​: Initial investment or cash outflow at time t=0t = 0t=0

Growth rate Increasing

Discounting
Year Beginning of year by 10% and End of Year
factor (12%)
(Decresing 5%)
0 9,300,000.00 -
 1 1,200,000.00 120,000.00 1,320,000.00 0.89
2 1,320,000.00 132,000.00 1,452,000.00 0.80
3 1,452,000.00 145,200.00 1,597,200.00 0.71
4 1,597,200.00 159,720.00 1,756,920.00 0.64
5 1,756,920.00 175,692.00 1,932,612.00 0.57
6 1,932,612.00 193,261.20 2,125,873.20 0.51
7 2,125,873.20 212,587.32 2,338,460.52 0.45
8 2,338,460.52 (116,923.03) 2,221,537.49 0.40
9 2,221,537.49 (111,076.87) 2,110,460.62 0.36
10 2,110,460.62 (105,523.03) 2,004,937.59 0.32
11 2,004,937.59 (100,246.88) 1,904,690.71 0.29
12 1,904,690.71 (95,234.54) 1,809,456.17 0.26
13 1,809,456.17 (90,472.81) 1,718,983.36 0.23
14 1,718,983.36 (85,949.17) 1,633,034.20 0.20
15 1,633,034.20 (81,651.71) 1,551,382.49 0.18
16 1,551,382.49 (77,569.12) 1,473,813.36 0.16
17 1,473,813.36 (73,690.67) 1,400,122.69 0.15
18 1,400,122.69 (70,006.13) 1,330,116.56 0.13
19 1,330,116.56 (66,505.83) 1,263,610.73 0.12
20 1,263,610.73 (63,180.54) 1,200,430.20 0.10
Total NPV
Cost
Net Profit

The project under consideration has a total Net Present Value (NPV) of $12.6 million over its 20-year
rate of 12%. When compared to the initial development cost of $9.3 million, the project yields a net pr
This positive NPV indicates that the project is financially viable, as the discounted value of expected fu
investment. The investment aligns with the company's financial goals and provides a sufficient return,
growth, decline, and discount rate are realistic.
g its Net Present Value (NPV) over a 20-year period. The key

nvestementor savings ,loan in todays term.

amount of money or stream of cash flows given a specified rate of

resent values of all individual

inflows and outflows).

=1∑n​(1+r)tCt​​−C0​

Net present value

(NPV)
Remark
 This means $1,2m in one years
is equivalent to $1.07142857 m
today, given the 12% discount
1,071,428.57 rate.
1,052,295.92
1,033,504.92
1,015,049.47
996,923.59
979,121.38
961,637.07
944,464.98
801,108.69
679,511.84
576,371.65
488,886.66
414,680.65
351,738.05
298,349.24
253,064.09
214,652.58
182,071.38
154,435.55
130,994.44
12,600,290.74
9,300,000.00
3,300,290.74

6 million over its 20-year lifespan, calculated using a discount

, the project yields a net profit of $3.3 million in today's terms.
ounted value of expected future cash flows exceeds the initial
ovides a sufficient return, assuming the assumptions about
 Test Sensitivity to Model Inputs
Assume Acron needs to decide whether to pursue the new drug, Niagra, by analyzing its Net
Present Value (NPV) over a 20-year period. The key elements are:

1. Initial development cost: $9.3 million (incurred at year 0).

2. Expected revenue Growth : Stsrts at $1.2 M in year 1
Increase at 8% up to 8 year
Declines at 5% from year 9 to year 20
3. Discount rate : 10%

Growth rate
Discounting
Increasing by Net present
Year Beginning of year End of Year factor
8% and value (NPV)
(10%)
(Decreasing 5%)

o 9,300,000.00 0
1 1,200,000.00 96,000.00 1,296,000.00 0.91 1,090,909.09
2 1,296,000.00 103,680.00 1,399,680.00 0.83 1,071,074.38
3 1,399,680.00 111,974.40 1,511,654.40 0.75 1,051,600.30
4 1,511,654.40 120,932.35 1,632,586.75 0.68 1,032,480.30
5 1,632,586.75 130,606.94 1,763,193.69 0.62 1,013,707.93
6 1,763,193.69 141,055.50 1,904,249.19 0.56 995,276.87
7 1,904,249.19 152,339.94 2,056,589.12 0.51 977,180.93
8 2,056,589.12 (102,829.46) 1,953,759.67 0.47 959,414.00
9 1,953,759.67 (97,687.98) 1,856,071.68 0.42 828,584.82
10 1,856,071.68 (92,803.58) 1,763,268.10 0.39 715,595.98
11 1,763,268.10 (88,163.40) 1,675,104.69 0.35 618,014.71
12 1,675,104.69 (83,755.23) 1,591,349.46 0.32 533,739.98
13 1,591,349.46 (79,567.47) 1,511,781.99 0.29 460,957.25
14 1,511,781.99 (75,589.10) 1,436,192.89 0.26 398,099.45
15 1,436,192.89 (71,809.64) 1,364,383.24 0.24 343,813.16
16 1,364,383.24 (68,219.16) 1,296,164.08 0.22 296,929.55
17 1,296,164.08 (64,808.20) 1,231,355.88 0.20 256,439.15
18 1,231,355.88 (61,567.79) 1,169,788.08 0.18 221,470.18
19 1,169,788.08 (58,489.40) 1,111,298.68 0.16 191,269.70
20 1,111,298.68 (55,564.93) 1,055,733.74 0.15 165,187.47
Total revenue 13,221,745.20
Cost 9,300,000.00
Net Profit 3,921,745.20
The project under consideration has a total Net Present Value (NPV) of $13.2 million over its 20-year
lifespan, calculated using a discount rate of 10%. When compared to the initial development cost of
$9.3 million, the project yields a net profit of $3.9 million in today's terms.
This positive NPV indicates that the project is financially viable, as the discounted value of expected
future cash flows exceeds the initial investment. The investment aligns with the company's financial
goals and provides a sufficient return, assuming the assumptions about growth, decline, and discount
rate are realistic.
 Test Sensitivity to Model Inputs

Assume Acron needs to decide whether to pursue the new drug, Niagra, by analyzing its Net Present
Value (NPV) over a 20-year period. The key elements are:

1. Initial development cost: $9.3 million (incurred at year 0).

2. Expected revenue Growth : Stsrts at $1.2 M in year 1
Increase at 12 % up to 8 year
Declines at 5% from year 9 to year 20
3. Discount rate : 14%

Growth rate
Increasing by 12% Discounting
Year Beginning of year End of Year
and (Decreasing factor (14%)
5%)

o 9,300,000.00 0
1 1,200,000.00 144,000.00 1,344,000.00 0.88
2 1,344,000.00 161,280.00 1,505,280.00 0.77
3 1,505,280.00 180,633.60 1,685,913.60 0.67
4 1,685,913.60 202,309.63 1,888,223.23 0.59
5 1,888,223.23 226,586.79 2,114,810.02 0.52
6 2,114,810.02 253,777.20 2,368,587.22 0.46
7 2,368,587.22 284,230.47 2,652,817.69 0.40
8 2,652,817.69 (132,640.88) 2,520,176.80 0.35
9 2,520,176.80 (126,008.84) 2,394,167.96 0.31
10 2,394,167.96 (119,708.40) 2,274,459.57 0.27
11 2,274,459.57 (113,722.98) 2,160,736.59 0.24
12 2,160,736.59 (108,036.83) 2,052,699.76 0.21
13 2,052,699.76 (102,634.99) 1,950,064.77 0.18
14 1,950,064.77 (97,503.24) 1,852,561.53 0.16
15 1,852,561.53 (92,628.08) 1,759,933.46 0.14
16 1,759,933.46 (87,996.67) 1,671,936.78 0.12
17 1,671,936.78 (83,596.84) 1,588,339.94 0.11
18 1,588,339.94 (79,417.00) 1,508,922.95 0.09
19 1,508,922.95 (75,446.15) 1,433,476.80 0.08
20 1,433,476.80 (71,673.84) 1,361,802.96 0.07
Total NPV
initial investment
Net cash flow
The project under consideration has a total Net Present Value (NPV) of $12.05 million over its 20-year
lifespan, calculated using a discount rate of 14%. When compared to the initial development cost of $9.3
million, the project yields a net profit of $2.75 million in today's terms.
This positive NPV indicates that the project is financially viable, as the discounted value of expected future
cash flows exceeds the initial investment. The investment aligns with the company's financial goals and
provides a sufficient return, assuming the assumptions about growth, decline, and discount rate are realistic.
a, by analyzing its Net Present

year 0).
ar 1
8 year
ear 9 to year 20

Net present value

(NPV)

1,052,631.58
1,034,164.36
1,016,021.12
998,196.19
980,683.98
963,479.00
946,575.86
929,969.26
774,974.38
645,811.99
538,176.66
448,480.55
373,733.79
311,444.82
259,537.35
216,281.13
180,234.27
150,195.23
125,162.69
104,302.24
12,050,056.45
9,300,000.00
2,750,056.45
05 million over its 20-year
ial development cost of $9.3

ounted value of expected future

mpany's financial goals and
, and discount rate are realistic.
MonthUnit Price Price Quantity Cost Total Revenue Total Cost Profit Assume Unit
(Demand) Price multiple of
10

1 450.00 45.00 250 20,250.00 11,250.00 9,000.00 280

2 300.00 103.00 250 30,900.00 25,750.00 5,150.00 290
3 440.00 49.00 250 21,560.00 12,250.00 9,310.00 300
4 360.00 86.00 250 30,960.00 21,500.00 9,460.00 310
5 290.00 125.00 250 36,250.00 31,250.00 5,000.00 320
6 450.00 52.00 250 23,400.00 13,000.00 10,400.00 330
7 340.00 87.00 250 29,580.00 21,750.00 7,830.00 340
8 370.00 68.00 250 25,160.00 17,000.00 8,160.00 350
9 500.00 45.00 250 22,500.00 11,250.00 11,250.00 360
10 490.00 44.00 250 21,560.00 11,000.00 10,560.00 370
11 430.00 58.00 250 24,940.00 14,500.00 10,440.00 380
12 390.00 68.00 250 26,520.00 17,000.00 9,520.00 390
250 400
250 410
250 420
250 430
250 440
250 450
250 460
250 470
250 480
250 490
250 500

Assumption
To estimate the relationship between price (PPP) and demand (D), we use a hypothetical trendline equa

D=−0.05P+90D

if DD icrese when p decrease

The coefficients −0.05-0.05−0.05 and 100 are chosen for illustration purposes. In practice, these values a
 Estimated Estimated revenue
Demand

total cost Profit

122.50 34,300.00 30,625.00 3,675.00
115.00 33,350.00 28,750.00 4,600.00 Less than 1000 books: $24 per book.
122.00 36,600.00 30,500.00 6,100.00 1000 to 1999 books: $23 per book.
118.00 36,580.00 29,500.00 7,080.00 2000 to 2999 books: $22.25 per book.
114.50 36,640.00 28,625.00 8,015.00 3000 to 3999 books: $21.75 per book.
122.50 40,425.00 30,625.00 9,800.00 4000 or more books: $21.30 per book.
117.00 39,780.00 29,250.00 10,530.00
118.50 41,475.00 29,625.00 11,850.00
125.00 45,000.00 31,250.00 13,750.00
124.50 46,065.00 31,125.00 14,940.00
121.50 46,170.00 30,375.00 15,795.00
119.50 46,605.00 29,875.00 16,730.00
100.00 40,000.00 25,000.00 15,000.00
100.00 41,000.00 25,000.00 16,000.00
100.00 42,000.00 25,000.00 17,000.00
100.00 43,000.00 25,000.00 18,000.00
100.00 44,000.00 25,000.00 19,000.00
100.00 45,000.00 25,000.00 20,000.00
100.00 46,000.00 25,000.00 21,000.00
100.00 47,000.00 25,000.00 22,000.00
100.00 48,000.00 25,000.00 23,000.00
100.00 49,000.00 25,000.00 24,000.00
100.00 50,000.00 25,000.00 25,000.00

pothetical trendline equation:

n practice, these values are derived using regression analysis on the historical data.
tep 1: Understand the Situation and Define Key Variables
1. Selling Price: $30 (selling price per book).
2. Unit Costs:
Less than 1000 books: $24 per book.
1000 to 1999 books: $23 per book.
2000 to 2999 books: $22.25 per book.
3000 to 3999 books: $21.75 per book.
4000 or more books: $21.30 per book.
3. Leftover Books: If Sam’s has leftover books when the paperback version is released, they will sell them for $10 each.
4. Demand: The demand for books is uncertain, ranging from 500 to 4500.
5. Objective: Maximize the profit based on the order quantity.
tep 2: Define the Profit Formula
The total profit will depend on the number of books ordered, the unit cost, the demand, and the revenue from selling the books
The formula for profit can be split into:

Profit=(Revenue from Books Sold at Full Price)+

(Revenue from Leftovers Sold at Discount)−(Total Cost)\text{Profit} = (\text{Revenue
from Books Sold at Full Price}) + (\text{Revenue from Leftovers Sold at Discount}) - (\
text{Total Cost})Profit=(Revenue from Books Sold at Full Price)+
(Revenue from Leftovers Sold at Discount)−(Total Cost)
Revenue from Books Sold at Full Price:

Revenue from Full Price=min⁡(Demand,Order Quantity)×30\text{Revenue from Full Price} = \min(\tex

Revenue from Leftovers Sold at Discount:
Revenue from Leftovers=max⁡(Order Quantity−Demand,0)×10\text{Revenue from Leftovers} = \max(\
Total Cost: Total Cost=Order Quantity×Unit Cost\text{Total Cost} = \text{Order Quantity} \times \text{Unit Cost}

30.00

list potential order Revenue from books

quantities Unit cost sold at full price
1000 21.3 #NAME? 21,300.00 #NAME?
ll them for $10 each.

ue from selling the books (both at the full price and possibly at the sale price for leftovers).

rom Full Price} = \min(\text{Demand}, \text{Order Quantity}) \times 30Revenue from Full Price=min(Demand,Order Quantity)×30

e from Leftovers} = \max(\text{Order Quantity} - \text{Demand}, 0) \times 10Revenue from Leftovers=max(Order Quantity−Demand,0)×1
ty} \times \text{Unit Cost}Total Cost=Order Quantity×Unit Cost
Order Quantity)×30

der Quantity−Demand,0)×10
#NAME?