Decision Tree

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%