P NPV [NPV-E ( NPV)]^2*P

0.27 9734.92 6155145.58

0.18 7920.86 1577667.97
0.25 2251.93 1797167.25
0.11 1617.01 1173661.25
0.12 778.00 2099008.97
0.08 1140.82 1167087.11
13969738.12

E ( NPV) 4960.32

3737.61
5% 1 2
0.6 7000 0.27 9734.92
4500
0.45 0.4 5000 0.18 7920.86

0.7 1900 0.25 2251.93

-900 1500
0.35 0.3 1200 0.11 1617.01

0.6 800 0.12 778.00

1000
0.2 0.4 1200 0.08 1140.82
1 4960.32
 Decision Tree

A firm is examining a three year life project which will be accepted based on the research outcome
If the Project is undertaken the project might succeed . Somewhat succeed or it may fail

1 2 3 4 5
Success 17000 21000 24000 30000 40000
Somewhat Succeed 12000 14000 16000 18000 21000
Fail 10000 10000 10000 11000 12000

There is a 45% chance of Success 35% chance of Somewhat Success and 20% chance of failure
The Initial Investment on the Project is Rs 100000 and the hurdle rate on the project is 14%
Compute the NPV on the Project.
1 2 3 4 5 NPV
45% 25000 28000 30000 35000 50000
21,930 21,545 20,249 20,723 25,968 10,415
35% 12000 14000 16000 18000 21000
-100000 10,526 10,773 10,800 10,657 10,907 (46,337)
20%
10000 10000 10000 11000 12000
8,772 7,695 6,750 6,513 6,232 (64,038)

E(NPV) (24,338.88)

A Pharma company is examining a project as follows

Initial Investment $700 million
There is a 75% chance that The authorities might give the clearance to sell
the drug in Europe and a 25% chance that the clearance will be denied.
If the Euoprean authorities give a go ahead then there is a 90% chance that
the US authorities will give a go ahead
If the European authorities do not approve there is only a 25% chance that
the Drug might get the approval in the US

Sales if Both Don’t Approve will be just in India to the Tune of $100 million per annum
IF Europe gives approval then the sales in Europe additionally will be $ 125 million per annum ( over and above
india sales)
If US gives approval then the sales in US will be in addition to India and Europe $ 240 million per annum.

The Hurdle Rate on the Project is 12%, the Life of the patent protection is 20 years and the annual sales
are expected to grow by 2%, Compute the NPV on the Project.
US Joint Probability Sales NPV
90% 67.50% 465 3233.70
Europe
75%
-700 Europe 10% 7.50% 225 1203.00
25% 25% 6.25% 340 2176.00

75% 18.75% 100 146.00

PV of Growing Annuity 100 2436.35

growth rate in sales 2% PMT 1- (1+g)^n
n 20 (1+i)^n
WACC 12% i-g

100 1- 1.49
9.65
10%
100 0.85
10%
845.96