Reference no: EM13794379

Scenario: MRK Pharmaceuticals has just developed a new drug for combating obesity. During the preliminary drug trials, it was also found to be effective in lowering cholesterol. MRK must now submit the drug for FDA approvals. They must decide if they will submit the drug for approval as both obesity and cholesterol, or for obesity only. For the obesity only decision, there is a 0.30 probability of approval. For the obesity and cholesterol approval, there is a 0.20 probability of approval. The estimated net present value of the profits for an obesity only drug is $500 million if it is approved and -$30 million if it is not approved (cost of development and clinical trials etc.). The estimated net present value of the profits for an obesity and cholesterol drug is $640 million if it is approved. If the FDA does not approve for both obesity and cholesterol, MRK can choose to sell the rights to an outside firm for further development to recoup some of the estimated development losses, resulting in an estimated net present value of $10 million, or it can re-submit the drug for obesity only approval. It has been determined that the resubmission for obesity only has a 0.24 probability of approval and a 0.76 probability it will not be approved. If approved for obesity only, the estimated net present value of the profits is $420 million, and -$70 million if it is not approved (total costs of approval process). a) For the above scenario, set up and solve the associated decision tree to portray the decision strategy with the highest expected net profit. Below the tree, state the decision strategy determined and the expected net profit. b) Provide the risk profile (table) of the strategy you specified in part a. c) Determine the EVPI for assessing the probability of approval for both obesity & cholesterol prior to submitting to the FDA. (show calculations/steps taken)