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.