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<h2 class="hd hd-2 unit-title">Motivation</h2>
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<h2 class="hd hd-2 unit-title">Real Options</h2>
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<h2 class="hd hd-2 unit-title">Decision Trees</h2>
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<h2 class="hd hd-2 unit-title">Exercise: Decision Trees</h2>
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Exercise: Decision Trees
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In practice, decision trees are used more frequently than option pricing theory to value biomedical projects. Therefore, let's revisit a previous exercise, but this time in the context of decision trees.</p>
<p>Imagine you are the CFO of ABC Pharmaceuticals, and you have just financed a Phase 3 clinical trial for a new migraine medication at a cost of $200 million. If the trial is successful, the market launch for the new therapy would cost $100 million, and would occur at the end of the clinical trial in 3 years. In addition, the present value of future commercialization profits at the moment of product launch is expected to be $650 million. The annualized cost of capital for the Phase 3 stage of the project is 12% per year. If the probability of success of the trial is 60%, then what is the project's rNPV? (Note: Your answer should be expressed in units of millions of dollars.)</p>
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<p style="display:inline">$</p>
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<p style="display:inline">million</p>
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