Q.3. Research and development manager associated a probability of success to 60% (0.6) with a research investment at time zero being successful and generating the need for an additional $300,000 development investment at the end of year 1, which is estimated to have a probability of 90% (0.9) of successfully generating profits of $200,000 per year for years 2 through 10, assuming a washout of escalation of operating cost and sales revenue. If failure occurs after the time zero research investment, a reclamation cost of $100,000 will be realized at the end of year 1. If failure occurs after year 1 investment, the salvage value will be $250,000 at the end of year 2 for equipment salvage. To achieve a before-tax ROR of 25% in this investment, use expected NPV analysis to determine how much money can we spent on research at time zero assuming the year 10 salvage value is zero. What is the risk-free project NPV valuation?
Q.3. Research and development manager associated a probability of success to 60% (0.6) with a research investment at time zero being successful and generating the need for an additional $300,000 development investment at the end of year 1, which is estimated to have a probability of 90% (0.9) of successfully generating profits of $200,000 per year for years 2 through 10, assuming a washout of escalation of operating cost and sales revenue. If failure occurs after the time zero research investment, a reclamation cost of $100,000 will be realized at the end of year 1. If failure occurs after year 1 investment, the salvage value will be $250,000 at the end of year 2 for equipment salvage. To achieve a before-tax ROR of 25% in this investment, use expected
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