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 $235 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $50 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? Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $14,300,000 $16,500,000 $19,200,000 $21,900,000 $24,800,000
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 $235 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $50 million today. Unfortunately, the firm’s
What is the
Should DAS continue with its plan to bring the drug to market, or should it abandon the project?
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | Year 7 | Year 8 | Year 9 |
| $0 | $0 | $0 | $0 | $14,300,000 | $16,500,000 | $19,200,000 | $21,900,000 | $24,800,000 |
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