Look again at the decision tree in Figure. Expand the possible outcomes as follows: Blockbuster: PV = $1.5 billion with 5% probability. Above

Look again at the decision tree in Figure. Expand the possible outcomes as follows:

• Blockbuster: PV = $1.5 billion with 5% probability.

• Above average: PV = $700 million with 20% probability.

• Average: PV = $300 million with 40% probability.

• Below average: PV = $100 million with 25% probability.

• “Dog”: PV = $40 million with 10% probability.

Redraw the decision tree. Is the $18 million investment in phase II trials still positiveNPV?

Phase III Trials and prelaunch (3 years) Invest 130? Succeed Upside 80% PV 700 Phase Il Trials, 2 years Yes, NPV= +295 20% Fail, PV0 arn /25% potential PV Invest 130? Succeed 50% Succeed Most likely 44% 80% PV 300 Invest 18 Yes, NPV +52 56% 20% Fail, PV = 0 Fail Invest 130? Succeed Downside PV 100 80% STOP, PV 0 20% Fail, PV