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# 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

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