Assume that a pharmaceutical firm knows it can develop a new drug in 12 years at an upfront cost of $300m (incurred in year 1). If the firm undertakes the drug development project, it knows it can earn an annual profit of $200m in each year (starting in year 13) that the drug is under patent.
a. Assuming the firm has a 10% discount rate, should it undertake the R&D project? (Show the math to justify your response.)