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Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Problem 01-15 (algo) 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? Instructions: Enter your response rounded to the nearest penny (two decimal places). Use a negative sign (-) where appropriate. $ |-4,193,74! Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Continue Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $11,400,000 $13,200,000 $15,300,000 $17,800,000 $22,400,0000
Transcribed Image Text:Problem 01-15 (algo) 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? Instructions: Enter your response rounded to the nearest penny (two decimal places). Use a negative sign (-) where appropriate. $ |-4,193,74! Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Continue Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $11,400,000 $13,200,000 $15,300,000 $17,800,000 $22,400,0000
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