Begin with the same setup as in Example 21.4, except that now it is one year earlier,
Question:
Begin with the same setup as in Example 21.4, except that now it is one year earlier, and Drugco is deciding whether to proceed with Phase II trials. Phase II trials will take one year and cost $50M. Following the Phase II trials, Drugco will learn some information about efficacy, denoted as Et, with Et ~ T[0, 80, 40], and about alternative efficacy denoted as At ~ T[50, 80, 50]. If, after learning this information, Drugco decides to go forward with Phase III trials, then everything is identical to Example 21.4, except that now the efficacy after Phase III trials is distributed as E ~ N[Et, 20], and alternative efficacy is distributed as A ~ T[At, At + 50, At]. All risks are technical risks, so all bets are zero and the appropriate discount rate is the riskfree rate of 5 percent.
(a) For what values of Et should Drugco continue on to Phase III trials?
(b) What is the NPV of Newdrug at the beginning of Phase II trials?
Discount RateDepending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
Set up the Phase III effiicancy abnd alternative effiicacy as dynamic assumptions that rely on Phase II results in cells B9 and B10 Experiment with di...View the full answer
Venture capital and the finance of innovation
ISBN: 978-0470454701
2nd Edition
Authors: Andrew Metrick
