Question: Bingosol is evaluating an opportunity to develop a new diabetes drug the opportunity is estimated to be worth $1.2B measured in todays dollars. The

  • Bingosol is evaluating an opportunity to develop a new diabetes drug – the opportunity is estimated to be worth $1.2B measured in today’s dollars. The company will need to spend $250M today to begin the research. In five years, the company will have to make a decision as to whether to go into full scale production and begin selling the drug. At that time, the company estimates it will cost $2.0B to move forward. If the appropriate risk-free rate is 2.5%, and the uncertainty as to the value of the opportunity can be modeled using an annual volatility of 60%, should the company spend the $250M today on R&D?

 

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