Refer to given Problem. As a part of Pharma-Excel's feasibility- study, they want to include information on the acceptance attitude of the public toward the new vitamin C product. Regardless of the optimistic, expected, and pessimistic scenarios on research and development, there is a chance the general public may not feel comfortable with the new product because it is based on a new technology. They estimate that the likelihood of the public accepting the product (and purchasing it) is 33.3% and not accepting it is 66.7%. The expected annual profit after the research is $1 000 000 if the public accepts the new product and $200 000 if the public does not accept it.
(a) Calculate the annual worth for all possible combinations of three R&D scenarios (optimistic, expected, and pessimistic) and two scenarios on public reaction (accept or not accept). Pharma-Excel's MARR is 15%.
(b) Using the annual worth information as the payoff information, build a decision tree for Pharma's problem. Should they proceed with the development of this new vitamin C product?
Problem :
Pharma-Excel is a pharmaceutical company They are currently studying the feasibility of a research project that involves improvement of vitamin C pills. To examine the optimistic, expected, and pessimistic scenarios for this project, they gathered the data shown below. Wha t is the expected annual cost of the vitamin C project? Assume Pharma-Excel's ALARR is 15%. Note that the lead time is different for each scenario.
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Optimistic
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Expected
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Pessimistic
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Research and development costs (at the end of research)
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$75,000
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$240,000
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$500,000
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Lead time to production(years)
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1
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2
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-
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Probability
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0.15
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0.5
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0.35
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