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 $190 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $55 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	$12,800,000	$14,200,000	$16,100,000	$18,600,000	$20,700,000

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.

______________

Answer 1

190m spent is sunk cost. it will not be taken into account while performing economic analysis

using formula P = F/(1+i)^t

NPW of project = -55000000 + 12800000/(1+0.09)^5 + 14200000/(1+0.09)^6 + 16100000/(1+0.09)^7 + 18600000/(1+0.09)^8 + 20700000/(1+0.09)^9

= -55000000 + 12800000/(1.09)^5 + 14200000/(1.09)^6 + 16100000/(1.09)^7 + 18600000/(1.09)^8 + 20700000/(1.09)^9

= -10541063.03

As NPW is negative, this project should not be selected