Approximately US economy $300 billion in medical expenses and lost productivity.

Question

Approximately US 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 $200 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $60 million today. Unfortunately, the firm's opportunity cost of funds is 5 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 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these addicts cost the Yeat $12, Year 8 $20,700, 0 Year 1 Year 2 Year 3 Year4 Year Year 7 Year S s0 s0 $17.20 $22,450,000 What is the net present value of the project? Instruction: Enter your response rounded to two decimal places 60107 36 the drug to market, or should it abandon the project? Contnue

Explanation / Answer

NPV = 107,364.15

accept the project

Discount rate 5.0000% Cash flows Year Discounted CF= cash flows/(1+rate)^year Cumulative cash flow (60,000,000.000) 0                  (60,000,000.00)               (60,000,000.00)                                -   1                                            -                 (60,000,000.00)                                -   2                                            -                 (60,000,000.00)                                -   3                                            -                 (60,000,000.00)                                -   4                                            -                 (60,000,000.00)      12,000,000.000 5                       9,402,314.00               (50,597,686.00)      13,400,000.000 6                       9,999,286.31               (40,598,399.69)      17,200,000.000 7                     12,223,718.88               (28,374,680.81)      20,700,000.000 8                     14,010,574.79               (14,364,106.02)      22,450,000.000 9                     14,471,470.17                       107,364.15

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