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

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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 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