3. Despite an enormous potential market, many Biotech companies have shied away from R&D funding related...

3. Despite an enormous potential market, many Biotech companies have shied away from R&D funding related to drug and alcohol addiction. 10 pts

Your firm, D&S, 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. Your opportunity cost of funds is 5%; unfortunately, it will take another four years before final approval from the Food and Drug Administration is achieved and the product is actually sold. Expected year–end profits are shown in the following diagram.

A. Should D&S continue with the plan to bring the drug to market or should it abandon its plan? What is your logic?

B. Discuss the relevance, if any, of the $200 million expenditure, to the decision to continue with the program. Relevant? Yes, No, why or why not?

C. Using the table(s) from class, show all your work, ie, the PV of each flow for every time period given the interest rate.

1. Year 1 $0

2. Year 2 $0

3. Year 3 $0

4. Year4 $5million

5. Year 5 $8million

6. Year 6 $13.4 million

7. Year 7 $17.2 million

8. Year 8 $20.7 million

9. Year 9 $22.40 million

D. Comment on the interest rate as it relates to the risk of this project. If the interest rate were 10%, what would happen to your PV and your answer.

Why?

Expert Solution

Rahul Sunny answered 8 months ago

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