The present value of development cost is Lira 480 million (L500million spread equally over 2 years).

The forecast of free cash flows for the company is shown in Exhibit 12.5.

The NPV of the drug is a negative 111 million. This analysis suggests that Eli Lilly should not proceed with the drug launch.

A similar DCF analysis suggests that Angina has a NPV of —1,118 million and AMI has a NPV of —730 million.

As pointed out earlier, this analysis ignores the volatility of changes in PTCA value. Treating Angina and AMI as options would yield an option value of 195.92 million. Subtracting the negative NPV of PTCA provides the "true" NPV of the venture (85.92 million).

Exhibit 12.5 DCF (NPV) for PTCA (L million)


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