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 $200 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $60 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 Year 2 Vear 3 Year 4 Year 5 $12.300,000 Year 6 $14,100,000 Year 7 $16,500,000 Year 8 Year 9 10 $18,300,000 $21, 300,e00

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 $200 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $60 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 Year 2 Vear 3 Year 4 Year 5 $12.300,000 Year 6 $14,100,000 Year 7 $16,500,000 Year 8 Year 9 10 $18,300,000 $21, 300,e00

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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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 $200 million to date working on a cure, but is now at a crossroads. It
can either abandon its program or invest another $60 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 (yeor-end) profits from selling the drug are presented in the accompanying table.
Year 2
Vear 3
10
Year 1
Year 4
50
Year S
$12,300,000
Year 6
$14,100,000
Year 7
$16,500,000
Year 8
$18.300, 000
Year 9
$21,300, ee0
What is the net present value of the project?
Instructions: Enter your response rounded to the nearest whole number. Do not round intermediate caiculations.
$1
Should DAS continue with its plan to bring he drug to market, or should it abandon the project?
(Cick to select

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UNITS OF VARIABLE TOTAL MARGINAL AVERAGE PRICE OF INPUT PRODUCT PRODUCT PRODUCT INPUT TOTAL VARIABLE COST AVERAGE VARIABLE COST TOTAL FIXED TOTAL AVERAGE TOTAL MARGINAL COST COST COST COST 012345678 0 $1 $2 6 $1 2 15 $1 27 $1 37 $1 45 $1 50 $1 52 $1 50 $1 ଖ ଖ ଖ ଖ ଖ ଖ ଖ ଖ ଖ $2 $2 $2 $2 $2 $2 $2 $2
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