Demand High p = 0.25 $55M 3- (15 points) Consider the research-and-development decision below. License Patent Technology Awarded $25M Continue p = 0.7 Development - $2M Develop Production and Marketing to Sell Product Directly -$10M No Patent - $2M p = 0.3 Demand Medium p=0.55 $33M Demand Low p = 0.20 $ISM Stop Development $0 If you decide to continue the project, you will have to come up with the $2 million this year (Year 1). Then there will be a year of waiting (Year 2) before you know if the patent is granted. If you decide to license the technology, you would receive the $25 million distributed as $5 million per year beginning in Year 3. On the other hand, if you decide to sell the product directly, you will have to invest $5 million in each of Years 3 and 4 (to make up the total investment of $10 million). Your net proceeds from selling the product, then, would be evenly distributed over Years 5 through 9. Cash flows of the each alternative plan is presented below. Assuming an interest rate of 15%, calculate the NPV at the end of each branch of the decision tree. Which will be the best decision in terms of NPV? Stop Cash Flows Year 0 0 0 Continue Continue Continue Continue Continue No Patent Patent Patent Patent Patent License Develop Develop Develop Dem. High Dem. Med Dem. Low 0 0 0 0 -2 -2 -2 0 0 0 0 5 -5 -5 -5 5 -5 -5 -5 5 11 6.6 3 5 11 6.6 3 5 11 3 0 11 6.6 3 11 6.6 3 0 1 2 3 4 5 6 7 8 9 0 0 0 0 OOOOOOOOO 6.6 0 0 Demand High p = 0.25 $55M 3- (15 points) Consider the research-and-development decision below. License Patent Technology Awarded $25M Continue p = 0.7 Development - $2M Develop Production and Marketing to Sell Product Directly -$10M No Patent - $2M p = 0.3 Demand Medium p=0.55 $33M Demand Low p = 0.20 $ISM Stop Development $0 If you decide to continue the project, you will have to come up with the $2 million this year (Year 1). Then there will be a year of waiting (Year 2) before you know if the patent is granted. If you decide to license the technology, you would receive the $25 million distributed as $5 million per year beginning in Year 3. On the other hand, if you decide to sell the product directly, you will have to invest $5 million in each of Years 3 and 4 (to make up the total investment of $10 million). Your net proceeds from selling the product, then, would be evenly distributed over Years 5 through 9. Cash flows of the each alternative plan is presented below. Assuming an interest rate of 15%, calculate the NPV at the end of each branch of the decision tree. Which will be the best decision in terms of NPV? Stop Cash Flows Year 0 0 0 Continue Continue Continue Continue Continue No Patent Patent Patent Patent Patent License Develop Develop Develop Dem. High Dem. Med Dem. Low 0 0 0 0 -2 -2 -2 0 0 0 0 5 -5 -5 -5 5 -5 -5 -5 5 11 6.6 3 5 11 6.6 3 5 11 3 0 11 6.6 3 11 6.6 3 0 1 2 3 4 5 6 7 8 9 0 0 0 0 OOOOOOOOO 6.6 0 0