Question: Redo the example in Figure 22.8, assuming that the real option is a put option allowing the company to abandon the R&D program if commercial

Redo the example in Figure 22.8, assuming that the real option is a put option allowing the company to abandon the R&D program if commercial prospects are sufficiently poor at year 2. Use put-call parity. The NPV of the drug at date 0 should again be +$7.7 million.

Figure 22.8

Call option Phase II trials, 2 years Phase III trials and prelaunch, 3 years PV at launch year 5 Forecast- S350) Succeed Succeed 44% 80% Invest $130 at year 2 Invest 18? 56% 20% Fail Fail PV-0 Underlying asset

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