A pharmaceutical company is considering investing in a clinical trial for a new drug. The clinical trial
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Question:
A pharmaceutical company is considering investing in a clinical trial for a new drug. The clinical trial will cost $5 million and has a 50% chance of success, which would result in a net profit of $20 million. However, there is also a 50% chance that the clinical trial will fail, resulting in a net loss of $5 million. The company's cost of capital is 10%, and the company has a risk tolerance of $1 million.
Using expected value and standard deviation, calculate the net present value and coefficient of variation of the project, and provide a recommendation to the company based on your calculations.
Note: Assume that all probabilities are independent. Use a discount rate of 10% for all calculations.
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