Unani Laboratories Limited (ULL) is considering a project for a new type of a herbal

medicine which would provide immunity against viruses such as Covid-19. The cost of

the project is PKR 60 million. The future cash flows of the project depend on the

demand for the medicine, which is uncertain. The company believes that there is a 25

percent chance that demand for the new medicine will be very high, in which case the

project will generate cash flows of PKR 35 million each year for 3 years. There is a 50

percent chance of average demand with cash flows of PKR 30 million each year for 3

years. There is a 25 percent chance that the demand will be low and annual cash flows

will be only PKR 10 million each year for three years. The cost of capital is 13%. ULL

could accept the project and implement it immediately. The company has acquired a

patent on the medicine. Therefore, ULL can also choose to delay the implementation of

the project by one year, when more information about demand will be available. If

delayed by one year, the investment cost will still be PKR 60 million and the project is

expected to generate the same cash flows as indicated above, but each cash flow will be

pushed back one year. If ULL waits for one year, it will know which of the demand

conditions, hence which set of cash flows, will exist. The company will make the

investment only if demand is sufficient to provide a positive NPV.

Required

A. What is the project's Expected NPV if the project is implemented immediately?

B. If ULL decides to wait for one year, what would be the Expected NPV?

Use Decision tree analysis to answer this question.

C. Should the company wait for one year, why or why not?