Young pharmaceuticals is considering a drug project that costs €2.54 million today and is excpected to generate end-of-year annual cash flows of €235,000 forever. At what discount rate would the company be indifferent between accepting or rejecting the project? this occurs when the PV of the project equals the project costs  

To determine the discount rate at which Young Pharmaceuticals would be indifferent to accepting or rejecting the project, we need to find the rate at which the present value (PV) of the future cash flows equals the initial cost of the project.

The project involves perpetually receiving annual cash flows of €235,000. The present value of a perpetuity is given by the formula:

\[
PV = \frac{C}{r}
\]

Where:
- \( PV \) is the present value of the perpetuity (which will be the same as the project cost),
- \( C \) is the annual cash flow (€235,000),
- \( r \) is the discount rate (what we're solving for).

The company will be indifferent when the present value equals the cost of the project:

\[
\text{Project Cost} = \frac{C}{r}
\]

Given:
- Project Cost = €2.54 million,
- \( C = 235,000 \).

Now, we solve for \( r \):

\[
2,540,000 = \frac{235,000}{r}
\]

\[
r = \frac{235,000}{2,540,000}
\]

Let me calculate this.The discount rate at which the company would be indifferent between accepting or rejecting the project is approximately **9.25%**.

Would you like further details on the calculation or any other aspect of this project?

Here are some follow-up questions to expand your understanding:
1. How does the choice of discount rate affect the net present value (NPV) of a project?
2. What happens if the discount rate is lower or higher than 9.25% in this scenario?
3. How do perpetuity formulas change for different types of cash flows (e.g., growing perpetuities)?
4. What are some other methods of evaluating investment projects besides the NPV method?
5. How would inflation impact the choice of discount rate in this project?

**Tip:** When evaluating projects with perpetuities, small changes in the discount rate can significantly impact the present value. Always check assumptions about long-term rates.

Young pharmaceuticals is considering a drug project that costs €2.54 million today and is expected to generate end-of-year annual cash flows of €235,000 forever. At what discount rate would the company be indifferent between accepting or rejecting the project? This occurs when the PV of the project equals the project costs.

Learn how to calculate the discount rate at which Young Pharmaceuticals would be indifferent between accepting or rejecting a drug project. This problem covers key finance concepts, including perpetuity and the present value formula, with a real-world example involving €2.54 million and €235,000 annual cash flows.

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