Hello,
I am studying for GMAT and a friend sent this exercise and I did not understand how to arrive at the Present Value (PV) of the Current Drug ($39.24 billion) and New Drug ($80.91 billion). Could someone help please?
Current Drug
• Currently, the insurance company expects to pay for all Alzheimer’s patients. We expect that 4 million will become Alzheimer’s patients. At $60,000 per patient, insurance companies would expect to pay a total of $240 billion.
• The interviewee should consider the time value of money. Discounting 20 years, assuming a discount rate of 10%, we calculate $39.24 billion. (The interviewer could suggest that the 10%, 20-yr discount factor is 1/6 to make things simple, and the interviewee would arrive at a total cost of $40 billion.)
New Drug
• There are 24 million individuals, and at $30 a month for 20 years, the total cost would be 24 million × $30/month × 12 months/year × 20 years = $172.80 billion. Assuming a discount rate of 10% for this 20-year perpetuity, we conclude that the drug coverage would cost $80.91 billion in today’s dollars. (The discount factor here is 1/6.)
I am studying for GMAT and a friend sent this exercise and I did not understand how to arrive at the Present Value (PV) of the Current Drug ($39.24 billion) and New Drug ($80.91 billion). Could someone help please?
Current Drug
• Currently, the insurance company expects to pay for all Alzheimer’s patients. We expect that 4 million will become Alzheimer’s patients. At $60,000 per patient, insurance companies would expect to pay a total of $240 billion.
• The interviewee should consider the time value of money. Discounting 20 years, assuming a discount rate of 10%, we calculate $39.24 billion. (The interviewer could suggest that the 10%, 20-yr discount factor is 1/6 to make things simple, and the interviewee would arrive at a total cost of $40 billion.)
New Drug
• There are 24 million individuals, and at $30 a month for 20 years, the total cost would be 24 million × $30/month × 12 months/year × 20 years = $172.80 billion. Assuming a discount rate of 10% for this 20-year perpetuity, we conclude that the drug coverage would cost $80.91 billion in today’s dollars. (The discount factor here is 1/6.)
