Advise the company using a decision tree

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Reference no: EM131404524

Scientists at the Medicament Drug Company have synthesized a new drug which they believe will be an effective treatment for stress and anxiety. The company must decide whether to proceed with the commercial development of the new drug or not. If they decide not to develop it, no further costs will be incurred. If they decide to develop it, they have to submit it for clinical testing before they can sell it. The probability that it will pass the tests is estimated to be 0.75. If it fails the tests the costs incurred will be £2m. If it passes the test the company has to decide whether to set up a small-scale or a large-scale production facility. The money it will make from the drug depends on whether it is approved for National Health Service use. If it is approved and they have set up large-scale production they will make a profit of £60m, compared to the £20m they will make if they have only small-scale production. If the drug is not approved they will make a loss of £40m if they have large-scale production and a profit of £5m if they have small-scale production. The probability of getting approval for NHS use is 0.4.

(a) Advise the company using a decision tree.

(b) How sensitive is the choice of large- or small-scale production to a change in the probability of the drug being approved for NHS use?

Reference no: EM131404524

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