Approximately 14 million Americans are addicted to drugsand 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 below: Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
$0 $0 $0 $0 $16,000,000 -$17,100,000 -$19,200,000
Year 8 Year 9
-$22,000,000 -$24,100,000
A. What is the net present value of the project?
B. Should DAS continue with its plan to bring the drug to market, or should it abandon the project?