Calculate the emv of your recommended strategy

Reference no: EM133311754

Decision Analysis for Managers

Assignment: Case Study - BMAC Research & Development Decision

In this assignment, you will continue with the analysis of the BMAC research & development (R & D) case study from assignment 2. For ease of reference, a copy of the case study is provided in the box below.

Case study: BMAC Research & Development decision

BMAC, a research and development (R & D) company, must decide whether to spend $2 million to continue with a particular drug development research project. The success of the project (as measured by obtaining a patent) is not assured, and at this point the decision- maker judges only a 65% chance of getting the patent. If the patent is awarded, the company can either license the patent for an estimated $25 million or invest an additional $10 million to create a production and marketing system to sell the product directly. If the company chooses the latter, it faces uncertainty of demand (categorized as high, medium or low demand) and associated profit from sales. The probabilities of the three levels of demand and associated revenues are summarised on the Table below.

Revisit the BMAC research & development (R & D) decision case study above and continue your analysis by addressing the following questions (approximately 500 words, excluding figures, excel spreadsheets and references).

1. Using your decision tree (from assignment 2) and the folding back the tree procedure, calculate the expected monetary value (EMV) of the two options at the root of the BMAC's decision problem i.e. (A) Continue with the R &D project at a cost of $ 2 Million or (B) Stop R & D project at no cost. Which alternative or strategy should BMAC pursue in order to maximize their revenues?

2. It may be expected that the EMV and hence your recommended strategy for BMAC obtained in in question 1 above critically depends on uncertain variables or chance events that are not within the control of the decision maker. Therefore, conduct a sensitivity analysis on your recommended strategy for BMAC and briefly explain the implications of your results to BMAC's decision problem.

3. Now consider a more realistic scenario for BMAC in which the costs and revenues, if they decide to continue with the project, will be spread out over time. In particular, if BMAC decides to continue the project, they will have to come up with the $2 million this year (Year 1). Then there will be a year of waiting (Year 2) before they know if they are successful (that is, the patent is granted). If they decide to license the technology, they would receive the $25 million distributed as $5 million per year beginning in Year 3. On the other hand, if they decide to sell the product directly, they will have to invest $5 million in each of Years 3 and 4 (to make up the total investment of $10 million). Their net proceeds from selling the product, then, would be evenly distributed over years 5 through 9. Now modify your decision tree (1) above to take account of the time value of money (that is, replace net revenues with NPVs).

Question: Calculate the (discounted) EMV of your recommended strategy and recommend the strategy or alternative that BMAC should pursue in order to maximize the NPV.

4. Compare/contrast your recommended strategy for BMAC that you arrived at in Question (1) with that in Question (3) and discuss the implications of taking account of the time value of money through discounting, generally in project appraisal and particularly in the case of BMAC.

Attachment:- BMAC Research and Development Decision.rar

Reference no: EM133311754

Questions Cloud

Which of the statements about esports are incorrect : Which of the statements about esports are incorrect, according to our lecture? In class we talked about Unbreakable Kimmy Schmidt (2021).

What will be the components of the sap system : What will be the components of the SAP system, what functionality is needed, how will the technology be used, and what data needs to be integrated

How these principles apply during user account management : How can you make a distinction between the principles of "Separation of Duties" and "Least Privilege"? Identify how these principles apply

Structure the decision problem faced by ameco : Structure the decision problem faced by AMECO and recommend the alternative or strategy that the company should pursue to maximize expected savings

Calculate the emv of your recommended strategy : Calculate the EMV of your recommended strategy and recommend the strategy or alternative that BMAC should pursue in order to maximize the NPV

Which method do you think is the least appropriate : Which method do you think is the least appropriate? Why? Calculate the MAD for each of the four techniques. Which is the best? Why?

What do you believe the woman at the far right represent : What do you believe the shell represents? What do you believe the woman at the far right represents? What is her connection to the birth of Venus?

Summary of the penelopiad and excerpts from natalie haynes : Provide a summary of The Penelopiad and Excerpts from Natalie Haynes, a Thousand Ships. discuss whether each one fits Campbell's model of the hero's journey.

How much of your organizations revenue is generated online : How much of your organization's revenue is generated online? What digital content do you currently provide to customers (or channel partners)?

User Account

All Pages