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Problem 1. Our company is considering investing $5 million in R+D for a new product. There is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we can build a facility to manufacture it in. This would cost $20 million. Demand for the product is uncertain. We've identified three likely scenarios: Scenario Revenue $25 million $35 $49 Probability Low Demand 20% Medium High 30% 50% Instead of making the product ourselves, another option is to sell the licensing rights to the product to another company. We can sell the rights for $12 million. Should we go ahead with the R+D project? If it's successful, should we make the product ourselves or sell the rights?

Problem 1. Our company is considering investing $5 million in R+D for a new product. There is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we can build a facility to manufacture it in. This would cost $20 million. Demand for the product is uncertain. We've identified three likely scenarios: Scenario Revenue $25 million $35 $49 Probability Low Demand 20% Medium High 30% 50% Instead of making the product ourselves, another option is to sell the licensing rights to the product to another company. We can sell the rights for $12 million. Should we go ahead with the R+D project? If it's successful, should we make the product ourselves or sell the rights?

Intermediate Financial Management (MindTap Course List)
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter13: Capital Budgeting: Estimating Cash Flows And Analyzing Risk
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Problem 6P: New-Project Analysis The Campbell Company is considering adding a robotic paint sprayer to its...
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Problem 1. Our company is considering investing $5 million in R+D for a new product. There is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we can build a facility to manufacture it in. This would cost $20 million. Demand for the product is uncertain. We've identified three likely scenarios: Scenario Probability Revenue $25 million $35 $49 Low Demand 20% Medium 30% High 50% Instead of making the product ourselves, another option is to sell the licensing rights to the product to another company. We can sell the rights for $12 million. Should we go ahead with the R+D project? If it's successful, should we make the product ourselves or sell the rights?
Transcribed Image Text:Problem 1. Our company is considering investing $5 million in R+D for a new product. There is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we can build a facility to manufacture it in. This would cost $20 million. Demand for the product is uncertain. We've identified three likely scenarios: Scenario Probability Revenue $25 million $35 $49 Low Demand 20% Medium 30% High 50% Instead of making the product ourselves, another option is to sell the licensing rights to the product to another company. We can sell the rights for $12 million. Should we go ahead with the R+D project? If it's successful, should we make the product ourselves or sell the rights?
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