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 $175 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $65 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. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $17,300,000 $18,900,000 $21,400,000 $23,900,000 $26,800,000 What is the net present value of the project? Instruction: Enter your response rounded to the nearest penny (two decimal places). Use a negative sign (-) where appropriate. $ Should DAS continue with its plan to bring the drug to market, or should it abandon the project?

Answer 1