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 $195 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 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 $0

Year 2 $0

Year 3 $0

Year 4 $0

Year 5 $13,100,000

Year 6 $15,200,000

Year 7 $16,800,000

Year 8 $18,300,000

Year 9 $19,900,000

1. What is the net present value of the project? Instruction: Round your answer to the nearest penny (2 decimal places). Use a negative sign (-) where appropriate.

Answer 1

Year	Cash Flow	Discount Factor at 7%	Discounted Cash Flow
0		1.00	-
1	-	0.93	-
2	-	0.87	-
3	-	0.82	-
4	-	0.76	-
5	13,100,000.00	0.71	9,340,118.95
6	15,200,000.00	0.67	10,128,401.80
7	16,800,000.00	0.62	10,462,195.66
8	18,300,000.00	0.58	10,650,766.61
9	19,900,000.00	0.54	10,824,281.48
			51,405,764.51
	Cost		-    60,000,000.00
	NPV		-      8,594,235.49

Since , its negative so, should not spend.