A pharmaceutical company is considering investing in a new drug development project. The project has a budget
Question:
A pharmaceutical company is considering investing in a new drug development project. The project has a budget of $15 million and is expected to take three years to complete. The company estimates that it will cost $12 million to complete the project, and they expect to make a profit of $8 million. However, they are concerned about the risks associated with the project. There is a 20% chance that the project will be delayed due to unforeseen circumstances, which will result in a cost increase of $2 million per year. In addition, there is a 10% chance that the project will fail to get regulatory approval, resulting in a loss of $5 million in sunk costs. The company estimates that there is a 50% chance that the drug will be successful, resulting in a profit of $20 million. If the drug is successful, there is a 25% chance that a competitor will enter the market and reduce the company's profits to $10 million.
Calculate the expected value and standard deviation of the profit for the project, and provide a recommendation to the company based on your calculations.