### Pharmaceutical Companies' Expected Payoffs**Scenario:**Big Cure and Little Cure are both pharmaceutical companies. Big Cure currently has a potential "blockbuster" drug awaiting approval from the Food and Drug Administration (FDA). If approved, this drug will generate $1 billion in net income for Big Cure.Little Cure has ten separate, less significant drugs also awaiting FDA approval. Each of these drugs is projected to bring in $50 million in net income for Little Cure if approved. The probability of the FDA approving any given drug is 50%.**Question:**What is the expected payoff for Little Cure's ten drugs?**Options:**- A. $250 million- B. $50 million- C. $1 billion- D. $0### Analysis and Calculation:To determine the expected payoff for Little Cure's ten drugs, you should consider the approval probability and potential income for each drug.1. **Probability of Approval:** 50% (or 0.5)2. **Net Income per Approved Drug:** $50 millionFor each drug:- Expected Income = Probability of Approval × Potential Income- Expected Income = 0.5 × $50 million = $25 millionSince there are ten independent drugs:- Total Expected Payoff = Number of Drugs × Expected Income per Drug- Total Expected Payoff = 10 × $25 million = $250 million### Conclusion:The expected payoff for Little Cure’s ten drugs is **$250 million**.---**Correct Answer:**- Option A: $250 million

The expected payoff refers to the probable outcome of the event or its value. Expected payoff =…

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug. before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income for Little Cure. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cure's ten drugs? A. $250 million B. $50 million C. $1 billion. OD. $0

Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug. before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $50 million in net income for Little Cure. The probability of the FDA approving a drug is 50%. What is the expected payoff for Little Cure's ten drugs? A. $250 million B. $50 million C. $1 billion. OD. $0

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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ABC Co is considering the launch of a new widget. If the product goes directly to the market, there is a 60% chance of success. For $500,000, the manager can conduct a focus group to increase the probability of success to 65%. Alternatively, the manager can pay a consulting firm $750,000 to research the market and refine the product. The consulting firm successfully launches new products 70% of the time. If the firm successfully launches the widget, the payoff will be $8 million. If the product is a failure, the NPV is $0. Calculate the expected NPV if the managers go directly to the market.
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Ang Electronics Inc. has developed a new DVD-R. If the DVD-R is successful, the PV of the payoff (when the product is brought to market) is $37 million. If the DVD-R fails, the PV of the payoff is $24 million. If the product goes directly to market, there is a 34 percent chance of success. Alternatively, Ang can spend $9.0 million immediately and delay the launch by one year to test market the DVD-R. Test marketing would allow the firm to improve the product and increase the probability of success to 80 percent. The appropriate discount rate is 14 percent. a. Calculate the NPV of going directly to market now. (Round the answer to the nearest whole number. Enter the answer in dollars, not millions of dollars. Omit $ sign in your response.) $ NPV b. Calculate the NPV of test marketing first. (Do not round intermediate calculations. Round the answer to 2 decimal places. Enter the answer in dollars, not millions of dollars. Omit $ sign in your response.) $ c. Should the firm conduct test…

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