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 $195 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 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.

Question

Year 1 - 0 
Year 2 - 0 
Year 3 - 0 
Year 4 - 0 
Year 5 - $13,100,000 
Year 6 - $15,200,000 
Year 7 - $16,800,000 
Year 8 - $18,300,000 
Year 9 - $19,900,000

Find the Net Present Value Rounded to two decimal places

Work
13,100,000(1.07)^6 + 15,200,000(1.07)^7 + 
16,800,000(1.07)^8 + $18,300,000(1.07)^9 + 19,900,000(1.07)^10 - 60,000,000

The answer i got was no where close to the NPV of $203,594,235 i believe i miscalculated somewhere

Bot · Answer

You are correct that there is a miscalculation in your formula. The exponents should be the negative of the number of years from now, since it is about discounting the future cash flows to the present. The correct formula and calculation should be:

NPV = 13,100,000/(1.07)^5 + 15,200,000/(1.07)^6 + 16,800,000/(1.07)^7 + 18,300,000/(1.07)^8 + 19,900,000/(1.07)^9 - 60,000,000

= 13,100,000/(1.07)^5 + 15,200,000/(1.07)^6 + 16,800,000/(1.07)^7 + 18,300,000/(1.07)^8 + 19,900,000/(1.07)^9 - 60,000,000
= 8,257,552.39 + 9,503,970.19 + 10,213,927.73 + 10,889,514.00 + 11,630,065.25 - 60,000,000
= 50,495,029.56 - 60,000,000
= -$9,504,970.44

The Net Present Value (NPV) is -$9,504,970.44 (rounded to two decimal places).