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15. 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 DrugAbuse Sciences (DAS)-is a notable exception. It has spent $170 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $30 million today. Unfortunately, the firm's opportunity cost of funds is 7 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. Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Explain. Year-End Profit Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $15,000,000 $16,500,000 $18,150,000 $19,965,000 $21,961,500

15. 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 DrugAbuse Sciences (DAS)-is a notable exception. It has spent $170 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $30 million today. Unfortunately, the firm's opportunity cost of funds is 7 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. Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Explain. Year-End Profit Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $15,000,000 $16,500,000 $18,150,000 $19,965,000 $21,961,500

EBK HEALTH ECONOMICS AND POLICY
EBK HEALTH ECONOMICS AND POLICY
7th Edition
ISBN:9781337668279
Author:Henderson
Publisher:Henderson
Chapter6: Population Health
Section: Chapter Questions
Problem 3QAP
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15. 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 DrugAbuse Sciences (DAS)-is a notable exception. It has spent $170 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $30 million today. Unfortunately, the firm's opportunity cost of funds is 7 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. Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Explain. Year-End Profit Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $15,000,000 $16,500,000 $18,150,000 $19,965,000 $21,961,500
Transcribed Image Text:15. 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 DrugAbuse Sciences (DAS)-is a notable exception. It has spent $170 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $30 million today. Unfortunately, the firm's opportunity cost of funds is 7 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. Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Explain. Year-End Profit Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $15,000,000 $16,500,000 $18,150,000 $19,965,000 $21,961,500
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