Approximately 14 million Americans are addicted to drugsand 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 addiciton. Your firm-Drug Abuse Sciences-is a notable exception. It has spent $165 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 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. What is the net present value of the project? yr 1 yr 2 yr 3 yr 4 yr 5 yr 6 yr 7 yr 8 yr 9 $0 $0 $0 $0 12,300,000 14,500,000 17,100,000 18,500,000 20,300,000
Approximately 14 million Americans are addicted to drugsand 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 addiciton. Your firm-Drug Abuse Sciences-is a notable exception. It has spent $165 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
What is the
| yr 1 | yr 2 | yr 3 | yr 4 | yr 5 | yr 6 | yr 7 | yr 8 | yr 9 |
| $0 | $0 | $0 | $0 | 12,300,000 | 14,500,000 | 17,100,000 | 18,500,000 | 20,300,000 |
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