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 $160 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $35 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. What is the net present value of the project?
ear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9$0$0$0$0$13,200,000$16,300,000$18,000,000$20,500,000$21,800,000
