Question: 28. Decision trees Look again at the decision tree in Figure 10.4. Expand the possible outcomes as follows: Blockbuster: PV = $1.5 billion with

28. Decision trees Look again at the decision tree in Figure 10.4.

28. Decision trees Look again at the decision tree in Figure 10.4. 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 positive NPV? Figure 10.4 Invest 130? Phase II Trials, 2 years Learn potential PV 25% Succeed Upside PV-700 80% Yes, NPV +295 20% Fail, PV-0 Succeed 80% Most likely PV 300 Yes, NPV +52 20% Fail, PM 0 Invest 1307 Succeed 50% 44% Invest 187 56% Fail PV= 0 25% Invest 130? Succeed 80% Downside PV-100 STOP, PV-0 20% Fail, PV-0

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