Assignment 4: Case Study Analysis - BMAC Research & Development Decision

Note: Please do make sure that you appropriately cite any reference material, using Harvard Referencing style and ensure that you draw from quality academic sources. On this note, remember that general internet sources such as Wikipedia and Investopedia are not recognised academic sources.

In this assignment, you will continue with the analysis of the BMAC research & development (R & D) case study from assignment 3. For ease of reference, a copy of the case study is provided in the box below.

Case study: BMAC Research & Development decision

BMAC, a research and development (R & D) company, must decide whether to spend $2 million to continue with a particular drug development research project. The success of the project (as measured by obtaining a patent) is not assured, and at this point the decision-maker judges only a 65% chance of getting the patent. If the patent is awarded, the company can either license the patent for an estimated $25 million or invest an additional $10 million to create a production and marketing system to sell the product directly. If the company chooses the latter, it faces uncertainty of demand (categorized as high, medium or low demand) and associated profit from sales. The probabilities of the three levels of demand and associated revenues are summarised on the Table below.

	Probability	Revenue ($M)
Demand High	0.2	55
Demand Medium	0.5	33
Demand Low	0.3	15

Revisit the BMAC research & development (R & D) decision case study above and continue your analysis by addressing the following questions (approximately 300 - 500 words, excluding figures, excel spreadsheets and references).

1. Analyse your decision tree model (from assignment 3) and recommend the strategy or alternative that BMAC should pursue in order to maximize their revenues. What is the expected monetary value (EMV) of your recommended strategy?

2. Identify some uncertain variables that may impact on your recommended strategy for BMAC and conduct a sensitivity analysis on your recommended decision for BMAC. Briefly explain the implications of your results to BMAC's decision problem.

3. Consider a more realistic scenario for BMAC in which the costs and revenues, if they decide to continue with the project, will be spread out over time. In particular, if BMAC decides to continue the project, they will have to come up with the $2 million this year (Year 1). Then there will be a year of waiting (Year 2) before they know if they are successful (that is, the patent is granted). If they decide to license the technology, they would receive the $25 million distributed as $5 million per year beginning in Year 3. On the other hand, if they decide to sell the product directly, they will have to invest $5 million in each of Years 3 and 4 (to make up the total investment of $10 million). Their net proceeds from selling the product, then, would be evenly distributed over years 5 through 9. Now modify your decision tree (1) above to take account of the time value of money (that is, replace net revenues with NPVs) and recommend the strategy or alternative that BMAC should pursue in order to maximize the NPV. What is the (discounted) EMV of your recommended strategy? (Notes: Assume a discount rate of 15% and calculate the Net present value (NPV) at the end of each branch of the decision tree. Organize your answer on an Excel spreadsheet)

Discount rate	All values are in millions of dollars
15%
	Yearly Cash Flows	Stop	Continue No Patent	Continue Patent License	Continue Patent Develop Dem. High	Continue Patent Develop Dem. Med	Continue Patent Develop Dem. Low
	1
	2
	3
	4
	5
	6
	7
	8
	9
	NPV

4. Compare/contrast your recommended strategy for BMAC that you arrived at in Question (1) with that in Question (3) and discuss the implications of taking account of the time value of money through discounting, generally in project appraisal and particularly in the case of BMAC.

5. In this case study, you have used a decision tree to choose the best alternative for BMAC. Briefly discuss at least one other example from the academic literature in your field of study or industry in which decision tree analysis have similarly been employed to make choices.