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 $225 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 6 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. $ 31.77 Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Continue Year 1 Year 2 $0 $0 Year 3 $0 Year 4 $0 Year 5 $11,300,000 Year 6 $15,900,000 Year 7 $17,400,000 Year 8 $19,100,000 Year 9 $22,300,000
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 $225 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 6 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. $ 31.77 Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Continue Year 1 Year 2 $0 $0 Year 3 $0 Year 4 $0 Year 5 $11,300,000 Year 6 $15,900,000 Year 7 $17,400,000 Year 8 $19,100,000 Year 9 $22,300,000
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter17: Making Decisions With Uncertainty
Section: Chapter Questions
Problem 6MC
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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 $225 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 6 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.
$ 31.77
Should DAS continue with its plan to bring the drug to market, or should it abandon the project?
Continue
Year 1 Year 2
$0
$0
Year 3
$0
Year 4
$0
Year 5
$11,300,000
Year 6
$15,900,000
Year 7
$17,400,000
Year 8
$19,100,000
Year 9
$22,300,000
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