What is the minimum probability of approval

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Reference no: EM133264637

Question: A company needs to decide whether or not to develop and market a drug. Once developed, the drug needs to be approved before it can be sold. If the drug is approved, the company will immediately incur costs of 1000.

The probability that the drug will be a success is 75%. If it is a success, the company will receive a net cash flow of 500 at the end of each year in perpetuity. If it is a failure, the company will receive a net cash flow of 500 at the end of year 1, declining by 100 each year for the following 4 years, and no cash flow thereafter.

Assume the appropriate discount rate is 8% per year (annual effective), what is the minimum probability of approval such that the expected NPV of the project is 1400?

Reference no: EM133264637

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