DNATECH has developed a hair growth treatment at a cost of $10 million. They can license the technology to another company for a period of 10 years. What is the minimum annual free cash flow they could accept in order to reach break-even NPV on this product? Use a discount rate of 8%.
A) $1,490,295
B) $1,639,324
C) $1,108,000
D) $1,000,000

Question

Quizplus · Accepted Answer

To find the minimum annual free cash flow for break-even NPV, we use the formula for the present value of an annuity. The present value of the cash flows should equal the initial investment of $10 million. Using the formula for the present value of an annuity: PV = C * [(1 - (1 + r)^-n) / r], where C is the annual cash flow, r is the discount rate (8% or 0.08), and n is the number of years (10). Solving for C gives approximately $1,490,295.

DNATECH Has Developed a Hair Growth Treatment at a Cost