Look again at the decision tree in Figure 10.6. Expand the possible outcomes as follows:
• Blockbuster: PV = $1.5 billion with 5% probability.
• Above average: PV = $700 million with 20% probability.
• Average: PV = $300 million with 40% probability.
• Below average: PV = $100 million with 25% probability.
• “Dog”: PV = $40 million with 10% probability.
Redraw the decision tree. Is the $18 million investment in phase II trials still positive NPV?
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