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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 $185 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $40 million today. Unfortunately, the firm’s opportunity cost of funds is 8 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.
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|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
|
$0 |
$0 |
$0 |
$0 |
$16,000,000 |
$17,100,000 |
$19,200,000 |
$22,000,000 |
$24,100,000 |
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.
$
Should DAS continue with its plan to bring the drug to market, or should it abandon the project?
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