Glaxo Co’s R & D division is considering to develop a new drug project to get ahead of its competitors. However, the project must be completed in 2 years at a cost of Rs. 1,00,000, otherwise the cost of project will increase by Rs.25,000 – if the project gets extended to 3 years. There are 60% chances that the project can be completed in 2 years itself. If the project let “years & itself” is not completed in 2 years then the management may decide either to extend the project to 3rd year or abandon it. If the project is completed in 2 years, the chances of success of drug projectare 50:50. However if the project is extended to 3rd year, the chances of success of project will be reduced to 40%. The likely returns from the project and the corresponding probabilities for two cases areas follows ;
Glaxo Co’s R & D division is considering to develop a new drug project to get ahead of its competitors. However, the project must be completed in 2 years at a cost of Rs. 1,00,000, otherwise the cost of project will increase by Rs.25,000 – if the project gets extended to 3 years. There are 60% chances that the project can be completed in 2 years itself. If the project let “years & itself” is not completed in 2 years then the management may decide either to extend the project to 3rd year or abandon it. If the project is completed in 2 years, the chances of success of drug projectare 50:50. However if the project is extended to 3rd year, the chances of success of project will be reduced to 40%. The likely returns from the project and the corresponding probabilities for two cases areas follows ;
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- Glaxo Co’s R & D division is considering to develop a new drug project to get ahead of its competitors. However, the project must be completed in 2 years at a cost of Rs. 1,00,000, otherwise the cost of project will increase by Rs.25,000 – if the project gets extended to 3 years. There are 60% chances that the project can be completed in 2 years itself. If the project let “years & itself” is not completed in 2 years then the management may decide either to extend the project to 3rd year or abandon it.
If the project is completed in 2 years, the chances of success of drug projectare 50:50. However if the project is extended to 3rd year, the chances of success of project will be reduced to 40%.
The likely returns from the project and the corresponding
|
Case – I Completion Period in 2 years |
Case- II Completion of project after Extension of to 3rd year. |
||
|
Probabilities |
Returns |
Probabilities |
Returns |
|
0.5 |
Rs.2,40,000 |
0.2 |
Rs.2,00,000 |
|
0.3 |
Rs.1,40,000 |
0.4 |
Rs.1,00,000 |
|
0.2 |
Rs.40,000 |
0.4 |
Rs.40,000 |
What decision should the Management take – Whether to undertake the project or not ?
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