Hello there! Want a discount? Grab 5% OFFon your first order!
originalresearchpapers.com logo
Hello there! Want a discount? Grab 5% OFF on your first order!

Our Services

Get 15% Discount on your First Order

Evaluating the Net Present Value (NPV) of Drug Abuse Sciences (DAS) Investment in a Cure for Drug and Alcohol Addiction Drug and alcohol addiction is a

Evaluating the Net Present Value (NPV) of Drug Abuse Sciences (DAS) Investment in a Cure for Drug and Alcohol Addiction

Drug and alcohol addiction is a significant issue in the United States, with approximately 14 million Americans affected. The federal government estimates that these addictions cost the U.S. economy $300 billion annually in medical expenses and lost productivity. Despite the vast potential market for a cure, many biotech companies have refrained from investing in research and development (R&D) for this cause. However, Drug Abuse Sciences (DAS) has already invested $160 million in developing a cure and now faces a critical decision: either abandon the program or invest an additional $35 million today. To make an informed decision, DAS must evaluate the Net Present Value (NPV) of the project.

Understanding Net Present Value (NPV)

NPV is a financial metric used to evaluate the profitability of an investment or project. It represents the difference between the present value of cash inflows and outflows over a given period, discounted at a specific rate. A positive NPV indicates that the projected earnings (in present value terms) exceed the anticipated costs, thus making the investment potentially profitable.

Given Data

  1. Additional Investment Required Today: $35 million
  2. Opportunity Cost of Funds (Discount Rate): 7% (0.07)
  3. Expected Year-End Profits from Selling the Drug:
    • Year 1: $0
    • Year 2: $0
    • Year 3: $0
    • Year 4: $0
    • Year 5: $13,200,000
    • Year 6: $16,300,000
    • Year 7: $18,000,000
    • Year 8: $20,500,000
    • Year 9: $21,800,000

Calculation Steps

To calculate the NPV, we need to discount each of the future cash flows back to their present value and then sum these values. The formula for calculating the present value (PV) of a future cash flow is:

PV=CFt(1+r)tPV = \frac{CF_t}{(1 + r)^t}PV=(1+r)tCFt​​

Where:

  • CFtCF_tCFt​ is the cash flow in year ttt
  • rrr is the discount rate
  • ttt is the year

The NPV is the sum of the present values of all future cash flows minus the initial investment:

NPV=∑t=1nCFt(1+r)t−Initial InvestmentNPV = \sum_{t=1}^{n} \frac{CF_t}{(1 + r)^t} – \text{Initial Investment}NPV=∑t=1n​(1+r)tCFt​​−Initial Investment

Detailed Calculation

  1. Year 1 to Year 4:

    • Cash Flow (CF) = $0
    • Present Value (PV) = \frac{0}{(1 + 0.07)^t} = $0 for each year.
  2. Year 5:

    • CF = $13,200,000
    • PV = \frac{13,200,000}{(1 + 0.07)^5} = \frac{13,200,000}{1.40255} \approx $9,407,287.75
  3. Year 6:

    • CF = $16,300,000
    • PV = \frac{16,300,000}{(1 + 0.07)^6} = \frac{16,300,000}{1.50073} \approx $10,857,614.39
  4. Year 7:

    • CF = $18,000,000
    • PV = \frac{18,000,000}{(1 + 0.07)^7} = \frac{18,000,000}{1.60578} \approx $11,209,887.77
  5. Year 8:

    • CF = $20,500,000
    • PV = \frac{20,500,000}{(1 + 0.07)^8} = \frac{20,500,000}{1.71819} \approx $11,934,640.25
  6. Year 9:

    • CF = $21,800,000
    • PV = \frac{21,800,000}{(1 + 0.07)^9} = \frac{21,800,000}{1.83846} \approx $11,854,145.29

Summing the Present Values

Total PV=0+0+0+0+9,407,287.75+10,857,614.39+11,209,887.77+11,934,640.25+11,854,145.29=55,263,575.45\text{Total PV} = 0 + 0 + 0 + 0 + 9,407,287.75 + 10,857,614.39 + 11,209,887.77 + 11,934,640.25 + 11,854,145.29 = 55,263,575.45Total PV=0+0+0+0+9,407,287.75+10,857,614.39+11,209,887.77+11,934,640.25+11,854,145.29=55,263,575.45

Calculating the NPV

NPV=Total PV−Initial InvestmentNPV = \text{Total PV} – \text{Initial Investment}NPV=Total PV−Initial Investment NPV=55,263,575.45−35,000,000=20,263,575.45NPV = 55,263,575.45 – 35,000,000 = 20,263,575.45NPV=55,263,575.45−35,000,000=20,263,575.45

Conclusion

The NPV of DAS’s additional $35 million investment is approximately $20,263,575.45. Since the NPV is positive, it indicates that the projected profits from the drug sales, discounted to their present value, exceed the additional investment required. Therefore, it would be financially advantageous for Drug Abuse Sciences (DAS) to proceed with the investment in the development of the cure for drug and alcohol addiction.

Share This Post

Email
WhatsApp
Facebook
Twitter
LinkedIn
Pinterest
Reddit

Order a Similar Paper and get 15% Discount on your First Order

Related Questions

English literature paragraph: Write a 250-word response to the week’s reading prompt: Set on a foreign planet inhabited by insect-like beings, “Bloodchild”

English literature paragraph: Write a 250-word response to the week’s reading prompt: Set on a foreign planet inhabited by insect-like beings, “Bloodchild” is a coming-of-age story, raising provocative questions about sex roles, self-sacrifice, colonization, and species- interdependence. How does this theme of the coming-of-age story function throughout the short story?

Academic Counseling  Assessment Desuсrіption: Educational institutions are evaluated on student outcomes, especially academic achievement. As such, school

Academic Counseling  Assessment Desuсrіption: Educational institutions are evaluated on student outcomes, especially academic achievement. As such, school counselors are tasked with supporting students in the area of academic development through the enhancement of knowledge, skills, and attitudes. The school counselor’s role in academic development focuses on fostering safe and inclusive learning

Wk 1 Environmental Disaster Memo Guide Use the following instructions to help you complete the Wk 1 – Summative Assessment: Environmental Disaster

Wk 1 Environmental Disaster Memo Guide Use the following instructions to help you complete the Wk 1 – Summative Assessment: Environmental Disaster Memo. Instructions Read “Environmental Disasters” from the University Library.   Choose1 environmental incident from “Environmental Disasters.”   Researchthe environmental incident you selected. ·         Find at least 5 additional resources related

Hello, I need help with a discussion post: 4-1 Discussion: Etiquette of Business Communications Read the article linked below, which lists and describes

Hello, I need help with a discussion post: 4-1 Discussion: Etiquette of Business Communications Read the article linked below, which lists and describes actionable best practices to improve equity and inclusivity in the workplace. Discuss your personal experience with business communication and discuss possible ways to approach communicating in different

You deserve a bonus!

Subscribe and get regular bonuses and discounts.