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The management team of Bonkers Biochem is considering whether they should move forward with an investment in a potential treatment for Alzheimer's. There are two
The management team of Bonkers Biochem is considering whether they should move forward with an investment in a potential treatment for Alzheimer's. There are two phases in the investment, the testing phase and the production phase. The testing phase will cost $1 billion and last for one year. The production phase will have the following characteristics: A $1 billion initial investment 10 years of production and sales Annual sales of $1O billion every year, with $2 billion in variable costs Annual $1 billion of fixed costs Annual $0.5 billion of depreciation 20% tax rate 10% cost of capital Bonkers Biochem will only move forward with the production phase if the testing phase proves successful. The likelihood of success is 5%
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