quiz_solve08 - FNCE 3010(Durham Fall 2007 Quiz 8 Merck the...

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FNCE 3010 (Durham). Fall 2007. Quiz 8. Merck, the pharmaceutical company, is considering entering the health insurance industry. The idea is to create a unit within the firm which would function as a typical health insurance provider. Merck hopes to be able to sell a type of insurance which would provide discounts on prescription drugs they manufacture. Each policy sold will generate net profits of $25. It is is not clear how well this product would be received by consumers. Merck believes that they will sell either 2 million policies or 5 million policies per year. Each scenario is equally likely. They will discover which scenario is true at the end of the first year. At that time, they can sell the unit for $500 million. Otherwise, they will continue to run the project for 9 more years. At the end of the tenth year, they will terminate the project (with no salvage value). Initial investment required for the project is $400 million. The investment will be depreciated over 10 years (straight-line method).
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