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Economics (Net Present Value

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

Find the Net Present Value Rounded to two decimal places

I tried entering
13,100,000(1.07)^6 + 15,200,000(1.07)^7 +
16,800,000(1.07)^8 + $18,300,000(1.07)^9 + 19,900,000(1.07)^10 - 60,000,000

The answer i got was no where close to the NPV of $203,594,235 unless i miscalculated somewhere

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Leo

  1. Hi Leo,

    Use formula, NPV=FV/(1+i)^n... - C. You almost had it right, but you multiplied instead of dividing.

    Little late than never.

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    Jessica

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