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 $245 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 9 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 $11,800,000 $14,100,000 $16,300,000 $18,500,000 $20,400,000

What is the net present value of the project?

Answer 1

The company already spent = 245 million. threstment now = 45 million. In this question 245 m. will be considered as sunk cost and not taken crito calculations. brital cost will be 45nd. Interest: 9% Expected year End Prosit will be year 1, 2, 3 & 4 = 0 year 5: 11,800,000 Yeer 6 : 14, 100, ooo Year 7 = 16,300,000 Years: 18.500,oou Yeera - 20, 400, ooo Calculate Net Present value. APU -- 45,000,000 +11,800,000 (170.09) 5 + 14,100,000 (170.09326 +16,300,000 (1+0.09) 18,500,000 (140.09) +20,400, ovo Cit 0.09309 HPV = -1,329,529.27. As the NPW Lo Project should be Rejected.