Note: There is no place for you to fill in answers for this question. So you need to show your work in an Excel/Word file or take a photo if you choose to work on a scratch paper, and upload it to the Laulima Dropbox.

Look again at the decision tree in Figure 10.4. Now the final possible outcomes are expanded as follows (see the attached figure):

• Blockbuster: PV=$1.5 billion with 5% probability;
• Above average: PV=$700 million with 20% probability;
• Average: PV=$300 million with 40% probability;
• Below Average: PV=$100 million with 25% probability;
• Dog: PV=$40 million with 10% probability;

Assume the cost of capital remains at 9.6%.

a. What is the NPV at the beginning of Phase III? Answer this question in $ million and keep two decimal places.

b1. What is the NPV at the beginning of Phase II? Answer this question in $ million and keep two decimal places.

b2. Is the $18 million investment in phase II trials still positive?