P 0.27 0.18 0.25 0.11 0.12 0.08
E ( NPV)
NPV [NPV-E ( NPV)]^2*P 9734.92 6155145.58 7920.86 1577667.97 2251.93 1797167.25 1617.01 1173661.25 778.00 2099008.97 1140.82 1167087.11 13969738.12 4960.32 3737.61 1
5%
4500 0.45
-900
1500 0.35
1000 0.2
0.6
2 7000
0.27
9734.92
0.4
5000
0.18
7920.86
0.7
1900
0.25
2251.93
0.3
1200
0.11
1617.01
0.6
800
0.12
778.00
0.4
1200
0.08 1
1140.82 4960.32
Decision Tree A firm is examining a three year life project which will be accepted based on the research outcome If the Project is undertaken the project might succeed . Somewhat succeed or it may fail
Success Somewhat Succeed Fail
1 17000 12000 10000
2 21000 14000 10000
3 24000 16000 10000
4 30000 18000 11000
5 40000 21000 12000
There is a 45% chance of Success 35% chance of Somewhat Success and 20% chance of failure The Initial Investment on the Project is Rs 100000 and the hurdle rate on the project is 14% Compute the NPV on the Project. 1 2 3 45% 25000 28000 30000 21,930 21,545 20,249 35% 12000 14000 16000 -100000 10,526 10,773 10,800 20% 10000 10000 10000 8,772 7,695 6,750
4 5 NPV 35000 50000 20,723 25,968 10,415 18000 21000 10,657 10,907 (46,337) 11000 6,513
12000 6,232 E(NPV)
(64,038) (24,338.88)
A Pharma company is examining a project as follows Initial Investment $700 million There is a 75% chance that The authorities might give the clearance to sell the drug in Europe and a 25% chance that the clearance will be denied. If the Euoprean authorities give a go ahead then there is a 90% chance that the US authorities will give a go ahead If the European authorities do not approve there is only a 25% chance that the Drug might get the approval in the US Sales if Both Don’t Approve will be just in India to the Tune of $100 million per annum IF Europe gives approval then the sales in Europe additionally will be $ 125 million per annum ( over and above india sales) If US gives approval then the sales in US will be in addition to India and Europe $ 240 million per annum. The Hurdle Rate on the Project is 12%, the Life of the patent protection is 20 years and the annual sales are expected to grow by 2%, Compute the NPV on the Project. US Joint Probability Sales NPV 90% 67.50% 465 3233.70 Europe 75% -700 Europe 10% 7.50% 225 1203.00 25% 25% 6.25% 340 2176.00 75% PV of Growing Annuity growth rate in sales n WACC
100 2% 20 12%
18.75%
100
146.00 2436.35
PMT
1-
(1+g)^n (1+i)^n i-g
100 1-
1.49 9.65 10%
100 845.96
0.85 10%