project flexibility mini case

7/21/2019 Project Flexibility Mini Case

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Time: 20 minutes

Super Drug Discovery

‘Super’ was a new pharmaceutical frm, solely ocused on the development o drugs to fght therecently identifed antibiotic resistant super bug. The frm had already procured all the researchreports available rom scientifc institutions on antibiotic resistant super bugs at a cost o $5 m.

The development o the new drug reuired an initial investment in !"# capital euipment to thetune o $% million. The !"# was e&pected to ta'e two years to complete and its outcome washighly ris'y. The yearly revenue e&penditure or !"# was e&pected to $(% million per annum.

These were e&pected to be spent, largely at the beginning o every year during the !"# phase. The !"# euipment was e&pected to be ully depreciated by the end o two years.

) the !"# outcome were ‘e&cellent’, then Super would have a new wonder drug against a rageo antibiotic resistant super bugs, which could be commerciali*ed at a later phase. Thecommercial value in this case was ad+udged as the greatest. owever, the probability or suchan ‘e&cellent’ outcome was only moderate -%./. 0 more li'ely ‘good’ outcome -probability %./could be discovery o a drug against any specifc super bug. 1bviously, the commerciali*ation

value would be relatively lower compared to that o an ‘e&cellent’ outcome. There was also a lowprobability -%.2/ or a ‘poor’ outcome with a less e3ective drug at the end o !"#. Thecommerciali*ation o such a drug would not have created any value or Super.

The commerciali*ation phase involved a ull4year ater completion o the !"# phase. The drugcould be launched in the mar'et only at end o the commerciali*ation phase. Thecommerciali*ation needed an investment o $25% million at the beginning o thecommerciali*ation phase. iven the high ris' o the frm, it aced a cost o capital o 256 perannum. The ree cash 7ows to Super rom the commerciali*ation are below -the cash 7ows arepresent values as at the end o the commerciali*ation phase/. Super en+oyed a ta&4ree status.

Status ooutcome !"#1utcome

8et cash7ows romcommerciali*ation

9robability o igh" :ow cash 7owsromcommerciali*ation

igh :ow igh :ow

;&cellent %% (%% %.< %.(

ood (%% 2%% %. %.=

9oor 425% 4%% %.2 %.>

Questions?

2. ) you ollow the discounted cash 7ow approach what is the expected NPV o the new drugdiscovery and commerciali*ation or ‘Super’ +ust beore the launch o the pro+ect@



(. 0ssuming that mangers o Super en+oyed ull 7e&ibility to choose the best course o action atthe end o the !"# phase, what would be the value o the pro+ect@



Q.1 Free cas estimation o! Super

Detai"s

Aash 7ow at the o the year

% 2 ( B 5

Q.2 Free cas estimation o! Super



Detai"s

Aash 7ow at the o the year

% 2 ( B 5

project flexibility mini case

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