Reference no: EM132213928
Question: Excelia Inc. is planning to develop a new drug and has to make a series of decisions during its development. Since Excelia has already signed contracts to provide its drug, stopping the development would cost then $250,000. However, if they were to continue the development, the production costs are expected to be $626,000. If they invest these costs they would have to conduct clinical trials and there is only a 30% chance the drug is successful in these trials. If it isn't successful, all invested money is lost. If it is successful, Excelia will have to seek FDA approval or stop development at this point. If they seek approval it will cost Excelia $25,000. There is a 60% chance the FDA will approve the drug and only a 40% chance they will not. Finally, if they approve the drug, there is various market potentials for the drug's demand. There is a 60% chance the market is large with an expected revenue of $6,202,000, a 30% chance the market is moderately sized with an expected revenue of $2,389,000, and a 10% chance the market is only small with an expected revenue of $1,749,000. Build a decision tree to model the decision process for Excelia Inc. and answer the following questions:
Which decision should Excelia make along the development process and what is the expected monetary value of that decision? To answer this question, implement the Decision Tree in Excel. Additionally, if it is possible your initial decision will lead to decisions which take place in the future (given the outcome of uncertain events), you detail the decisions you would make at this point as well.
How sensitive is the decision to conduct clinical trials to the probability the drug is successful? To answer the question, vary the probabilities and document and/or graph what happens at various probabilities on a new spreadsheet within Excel. Upload both this new tab and your decision tree.
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