1)You are evaluating a new medical procedure that is undergoing clinical trials. Stage 1 trials were successful and the company is embarking on Stage 2 trials. Experts have told you that the probabilities of the procedure successfully passing Stage 2 and Stage 3 are 60% and 70% respectively. The costs of Stage 2 and 3 trials are $10 and $15 million dollars, respectively, and they will be incurred one and four years from now, respectively. You apply a discount rate of 12% for valuation purposes.

a)If drug trials are successful, the company will commercialize the medical procedure four years from now. How large would the NPV of commercialization have to be at that time (four years from now) in order for the company to breakeven on its clinical trials? (3 marks)