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Consider an investment project on a new listening aid device with following NPV
outcomes and their conditional probabilities. We develop the device prototype, the
outcome can be successful, and we can introduce the device to the market, or it may
fail, and we dont offer any new product. The 500 million dollars value of success
includes the initial prototyping cost which is 30 million dollars as given as the failure
value.
Success: (0.17, 500)
Failure: (0.83, -30)
2.1 The shareholders do not trust probability values and asked us to find the breakeven
probability point for success. How do you calculate that? They also want you to draw
a figure showing the expected NPV values as a function of probability values.
2.2 The shareholders are thinking of collaborating with another research institute and
having a farmout agreement. First, suggest a farmout value that provides same EV
for the NPV when the initial probability of success and failure is considered. Second,
what would be the EV for the NPV in the farmout agreement if the farmout value is
set to 40%?
2.3 What is the expected value of NPV if the probability of success varies within a range
of (0.05-0.35)?
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