Look again at the example in Figure. The R&D team has put forward a proposal to invest an extra $20 million in expanded phase II trials. The object is to prove that the drug can be administered by a simple inhaler rather than as a liquid. If successful, the scope of use is broadened and the upside PV increases to $1 billion. The probabilities of success are unchanged. Go to the €œlive€ Excel spreadsheet version of Table at www.mhhe.com/ bma. Is the extra $20 million investment worthwhile? Would your answer change if the probability of success in the phase III trials falls to75%?

Industries with high operating leverage Industries with low operating leverage DOL DOL .56 .79 .88 Industry Industry 2.20 utilities 1.99 1.57 Food Autos Phase II Trials and prelaunch (3 years) Invest 130 Succeed Upside PV 700 80% Phase Il Trials, 2 years Yes, NPV-+295 20% Fail, PV 0 potential PV /25% Invest 130? 50% Succeed Most likely 44% PV 300 Invest 187 Yes, NPV +52 56% Fail, PV-0 Fail 25% Invest 130? Succeed Downside 80% PV 100 STOP, PV-0 20% Fail, PV O