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 $215 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $70 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. Year 1 Year 2 Year 3 Year 4 Year 5 Year6Year 7 Year 8 Year 9 $0 | $0 | $0 | $0 |$14,500,000|$16,200,000!$18,300,000!$20,600,000 $21.800,000 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? (Click to select v

Answer 1

Initial investment propose to be invested today = $70 Million

Discount rate = 7%

NPV = Present value of cash inflows – initial investment

NPV = (CF1/(1+R) + CF2/(1+R)^2 + CF3/(1+R)^3 + CF4/(1+R)^4 + CF5/(1+R)^5 + CF6/(1+R)^6 + CF7/(1+R)^7 + CF8/(1+R)^8 + CF9/(1+R)^9 )   - initial investment

NPV =(0+0+0+0+ 14500000/(1+.07)^5 + 16200000/(1+.07)^6 + 18300000/(1+.07)^7 + 20600000/(1+.07)^8 + 21800000/(1+.07)^9 ) - 70000000

NPV = 56376507 - 70000000

NPV =-$1,36,23,493

Since, NPV is Negaitive. Thus, DAS should not continue with plan to bring out the drug to the market.