15. 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—DrugAbuse Sciences (DAS)—is a notable exception. It has spent

$170 million to date working on a cure, but is now at a crossroads. It can either abandon its program or invest another $30 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. Should DAS continue with its plan to bring the drug to market, or should it abandon the project? Explain.

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Year-End Profit Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 $0 $0 $0 $0 $15,000,000 $16,500,000 $18,150,000 $19,965,000 $21,961,500