Approximately 14 million Americans are addicted to drugs and alcohol. The federa

Question

Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost productivity. Despite the enormous potential market, many biotech companies have shied away from funding research and development (R&D) initiatives to find a cure for drug and alcohol addiction. Your firm – Drug Abuse Sciences (DAS) – is a notable exception. It has spent $205 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $45 million today. Unfortunately, the firm’s opportunity cost of funds is 5 percent and it will take another five years before final approval from the Federal Drug Administration is achieved and the product is actually sold. Expected (year-end) profits from selling the drug are presented in the accompanying table.

Year 1 $0
Year 2 $0
Year 3 $0
Year 4 $0
Year 5 $11,400,000
Year 6 $13,200,000
Year 7 $15,300,000
Year 8 $17,800,000
Year 9 $22,400,000

1. What is the net present value of the project?

Instruction: Round your answer to the nearest penny (2 decimal places). Use a negative sign (-) where appropriate.

$____________________________

Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the U.S. economy $300 billion in medical expenses and lost productivity. Despite the enormous potential market, many biotech companies have shied away from funding research and development (R&D;) initiatives to find a cure for drug and alcohol addiction. Your firm - Drug Abuse Sciences (DAS) - is a notable exception. It has spent $205 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $45 million today. Unfortunately, the firm's opportunity cost of funds is 5 percent and it will take another five years before final approval from the Federal Drug Administration is achieved and the product is actually sold. Expected (year-end) profits from selling the drug are presented in the accompanying table. What is the net present value of the project?

Explanation / Answer

Project should be accepted

Note: $ 205 Millions not onsidered in cash flows it not relevant in taking decision as already incurred(Sunk cost)

Net Present Value Year Cash flows PVF@5% 0 -45000000 1 -45000000 1                     -   0.952380952 0 2                     -   0.907029478 0 3 0 0.863837599 0 4 0 0.822702475 0 5 11400000 0.783526166 8932198 6 1,32,00,000 0.746215397 9850043 7 15300000 0.71068133 10873424 8 17800000 0.676839362 12047741 9 22400000 0.644608916 14439240 NPV 11142646

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.