Jackson Pharmaceuticals Inc. is considering funding a research team to cure Lyme’s disease. Bill Mackenzie, executive VP of research, must ultimately make this decision. The research program has a total price tag of $10M (million), and there is no guarantee that it will be successful. In fact, Bill estimates only a 40% chance that they will find a cure. If the research team finds a cure, Jackson Pharmaceuticals must then decide whether they wish to produce the drug themselves or sell the license to a chemical lab for $40M revenue. If they produce the product themselves and production goes smoothly, they forecast a revenue of $60M. However, refitting one of their production facilities is not without risk. There is a 30% chance of production troubles, in which case they would earn only $20M revenue.

What should Bill McKenzie do? (Result: Expected Monetary Value or payoff from a successful R&D project = $9.2 M)

How do you think the probability, cost, and revenue information used in this analysis were obtained?

Answer rating: 100% (QA)

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