Approximately 14 million Americans are addicted to drugs and alcohol. The federal government estimates that these...

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Approximately 14 million Americans are addicted to drugs andalcohol. The federal government estimates that these addicts costthe U.S. economy $300 billion in medical expenses and lostproductivity. Despite the enormous potential market, many biotechcompanies have shied away from funding research and development(R&D) initiatives to find a cure for drug and alcoholaddiction. Your firm – Drug Abuse Sciences (DAS) – is a notableexception. It has spent $195 million to date working on a cure, butis now at a crossroads. It can either abandon its program or investanother $60 million today. Unfortunately, the firm’s opportunitycost of funds is 7 percent and it will take another five yearsbefore final approval from the Federal Drug Administration isachieved and the product is actually sold. Expected (year-end)profits from selling the drug are presented in the accompanyingtable.
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 anegative sign (-) where appropriate.

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4.4 Ratings (678 Votes)

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.

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Transcribed Image Text

Approximately 14 million Americans are addicted to drugs andalcohol. The federal government estimates that these addicts costthe U.S. economy $300 billion in medical expenses and lostproductivity. Despite the enormous potential market, many biotechcompanies have shied away from funding research and development(R&D) initiatives to find a cure for drug and alcoholaddiction. Your firm – Drug Abuse Sciences (DAS) – is a notableexception. It has spent $195 million to date working on a cure, butis now at a crossroads. It can either abandon its program or investanother $60 million today. Unfortunately, the firm’s opportunitycost of funds is 7 percent and it will take another five yearsbefore final approval from the Federal Drug Administration isachieved and the product is actually sold. Expected (year-end)profits from selling the drug are presented in the accompanyingtable.Year 1 $0Year 2 $0Year 3 $0Year 4 $0Year 5 $13,100,000Year 6 $15,200,000Year 7 $16,800,000Year 8 $18,300,000Year 9 $19,900,0001. What is the net present value of the project? Instruction:Round your answer to the nearest penny (2 decimal places). Use anegative sign (-) where appropriate.