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 $ 200 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 5 percent, and it will take another five years before final approval from the Food and 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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