Using the template below, please provide answers in excel template

One of your colleagues pointed out that instead of starting construction before the FDA approval, the company can invest only $0.8 B next year (depreciated over 10 years) and delay the remaining $1.2 B investment (depreciated over 8 years) for two years until the drug gets approved. Only if the drug gets approved will Fosbeck proceed with the second stage investment, which will take place in three years. The sales will commence in four years at the level of $10 B with subsequent annual growth of 50% over the next three years, after which the sales will be stable for another 5 years due to delay the company will lose two years of revenues. The probability of patent obsolescence remains the same as before 5% each year.

What is the NPV of this two-stage investment?

Two-stage investment alternative can be evaluated by simply calculating the NPV for two different outcomes (FDA approval or not) and then finding the expected value. Alternatively a Monte Carlo simulation can be used (see below). To check your calculations look at expected NPVs found using these two approaches - they should be nearly identical.

Is the option to delay the project valuable? Explain. Please show excel formula and calculations using the template below.

CoGS ratio	15%
growth	50%
SGA	$2.00
CapEx	$2.00
Revenue1	$10.00
Project Life	10 years
Tax rate	38%
R&D	$0.60
probability of approval	10%
probability of obsolescence	5%
WACC	12%
Real Option Modification		Depreciation
CapEx 1	$0.80	10 years
CapEx 2	$1.20	8 years
Two-stage investment alternative can be evaluated by simply calculating the NPV for two different outcomes (FDA approval or not) and then finding the expected value. Alternatively a Monte Carlo simulation can be used. To check your calculations look at expected NPVs found using these two approaches - they should be nearly identical.
														Evaluating two outcomes separately
If approved by FDA (project can still get obsolete in later years)
	Year	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028
	Probability of Success
	Revenue
	Cost
	SGA
	R&D
	Depreciation
	EBIT
	Taxes
	Net Income
	OCF
	CapEx
	FCF
	NPV
	IRR
If FDA does not approve (project fails)
	Year	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028
	Probability of Success
	Revenue
	Cost
	SGA
	R&D
	Depreciation
	EBIT
	Taxes
	Net Income
	OCF
	CapEx
	FCF
	NPV
	IRR
	Expected NPV