Problem 1. Our company is considering investing $5 million in R+D for a new product. There is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we can build a facility to manufacture it in. This would cost $20 million. Demand for the product is uncertain. We've identified three likely scenarios: Scenario Revenue $25 million $35 $49 Probability Low Demand 20% Medium High 30% 50% Instead of making the product ourselves, another option is to sell the licensing rights to the product to another company. We can sell the rights for $12 million. Should we go ahead with the R+D project? If it's successful, should we make the product ourselves or sell the rights?

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Problem 1. Our company is considering investing $5 million in R+D for a new product. There
is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we
can build a facility to manufacture it in. This would cost $20 million.
Demand for the product is uncertain. We've identified three likely scenarios:
Scenario
Probability
Revenue
$25 million
$35
$49
Low Demand
20%
Medium
30%
High
50%
Instead of making the product ourselves, another option is to sell the licensing rights to the
product to another company. We can sell the rights for $12 million.
Should we go ahead with the R+D project? If it's successful, should we make the product
ourselves or sell the rights?
Transcribed Image Text:Problem 1. Our company is considering investing $5 million in R+D for a new product. There is a 50% chance the R+D will lead to a viable product. If we come up with a new product, we can build a facility to manufacture it in. This would cost $20 million. Demand for the product is uncertain. We've identified three likely scenarios: Scenario Probability Revenue $25 million $35 $49 Low Demand 20% Medium 30% High 50% Instead of making the product ourselves, another option is to sell the licensing rights to the product to another company. We can sell the rights for $12 million. Should we go ahead with the R+D project? If it's successful, should we make the product ourselves or sell the rights?
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