Submitted by:
Keren Kezia Camalon
Thaddeaus Embile
Anika Mae Fiero
Scarlet Gabayoyo
Antonette Somcio
Submitted To:
In order to come up with the best strategic option that can add value to the
company, the following are the considerations:
The increase/decrease of the testing and marketing cost and its effect
on best/worst case scenario analysis.
The level of market penetration and its profitability
The length of time for FDAs approval
Establishing a strategic option
Competitors
The details in the case give us three possible scenarios namely, Best case
scenario, Most Iikely scenario, and Worst case scenario. We assumed that
the probability is equal. The initial cash inflow is computed as follows
Given Data:
Market Testing Marketing Development
Share Costs Costs Costs Total Costs
$9 $90
BestCase Scenario 10% million million $80 million $179 million
$10 $100
Most Likely Scenario 8% million million $80 million $190 million
$11 $110
Worst Case Scenario 6% million million $80 million $201 million
Year
6 7 8 9 10
Population With Myopia 47.8 49.2 50.7 52.2 53.8
Market Share (8%) 3.82 3.94 4.05 4.18 4.30
Year
6 7 8 9 10
Population With Myopia 47.8 49.2 50.7 52.2 53.8
Market Share (8%) 2.87 2.95 3.04 3.13 3.23
NPV
Best Case Scenario $80.7
Most Likely Scenario $17.76
Worst Case Scenario $45.18
53.28
Probability 0.3333333
Expected NPV 17.76
Thus, there is a 1/3 probability that the market conditions will be in its best
case, in which the project will generate cash flows as shown above. There is
also a 1/3 probability that market conditions will be in a most likely scenario,
in which the project will generate cash flows as shown above. There is also a
1/3 probability that market conditions will be in worst case, in which the
project will generate cash flows as shown above.
YEAR
0 1 2 3 4 5
Best Case Scenario
(10%) ($179) 42.44 $43.71 45.02 46.37
YEAR
6 7 8 9 10 11
Best Case Scenario
(10%) 47.76 49.19 50.67 52.19 53.76 55.37
YEAR
6 7 8 9 10 11
Most Likely Scenario (8%) 38.21 39.36 40.54 41.75 43.01 44.3
YEAR
0 1 2 3 4 5
Worst Case Scenario (6%) ($201) 25.46 26.23 27.01 27.82
Cost of Capital (12%) 0.893 0.797 0.71 0.636
PV of Cash Inflows 20.3 18.67 17.17 15.79
YEAR
6 7 8 9 10 11
Worst Case Scenario (6%) 28.66 29.52 30.4 31.31 32.25 33.22
Cost of Capital (12%) 0.567 0.507 0.452 0.404 0.361 0.322
PV of Cash Inflows 16.26 14.96 13.75 12.65 11.63 10.70
Net Present Value (NPV)
PV of Cash Inflows 151.87
PV of Cash Outlay $201
Net Present Value 49.13
Best Case Scenario 88.49
Most Likely Scenario 24.00
Worst Case Scenario 48.82
63.67
Probability 1/3
Expected NPV 21.22333
Here we can see the weight and probability of each scenario and the NPV of the
project if it will be delayed for 1 year. The NPV is positive which shows that this project
will realize an inflow.
In this section, we will see the companys cash inflows if the company will
delay the project for two years.
YEAR
0 1 2 3 4 5 6
Best Case Scenario
(10%) ($179) 43.71 45.02 46.37 47.76
YEAR
7 8 9 10 11 12
Best Case Scenario
(10%) 49.19 50.67 52.19 53.76 55.37 57.03
Cost of Capital
(12%) 0.893 0.797 0.71 0.636
PV of Cash
Inflows 31.22 28.71 26.41 24.28
YEAR
7 8 9 10 11 12
Most Likely
Scenario (8%) 39.36 40.54 41.75 43.01 44.3 45.62
Cost of Capital
(12%) 0.567 0.507 0.452 0.404 0.361 0.322
PV of Cash
Inflows 22.33 20.54 18.89 17.37 15.98 14.69
Net Present
Value (NPV)
YEAR
0 1 2 3 4 5 6
Worst Case Scenario
(6%) ($201) 26.23 27.01 27.82 28.66
Here we can see the weight and probability of each scenario and the NPV
of the project if it will be delayed for 1 year. The NPV is positive which shows
that this project will realize an inflow.
YEAR
0 1 2 3 4 5 6
Best Case
Scenario (10%) ($179) 45.02 46.37 47.76
Cost of Capital
(12%) 0.893 0.797 0.71
PV of Cash
Inflows 40.20 36.97 33.99
YEAR
7 8 9 10 11 12 13
Best Case
Scenario (10%) 49.19 50.67 52.19 53.76 55.37 57.03 58.74
Cost of Capital
(12%) 0.636 0.567 0.507 0.452 0.404 0.361 0.322
PV of Cash
Inflows 31.26 28.75 26.44 24.32 22.36 20.57 18.91
Net Present
Value (NPV)
YEAR
0 1 2 3 4 5 6
Most Likely Scenario (8%) ($190) 36.02 37.1 38.21
YEAR
7 8 9 10 11 12 13
Most Likely Scenario (8%) 39.36 40.54 41.75 43.01 44.3 45.62 46.99
Cost of Capital (12%) 0.636 0.567 0.507 0.452 0.404 0.361 0.322
Cost of Capital
(12%) 0.893 0.797 0.712
PV of Cash
Inflows 24.12 22.18 20.40
YEAR
7 8 9 10 11 12 13
Worst Case
Scenario (6%) 29.52 30.4 31.31 32.25 33.22 34.22 35.24
Cost of Capital
(12%) 0.636 0.567 0.507 0.452 0.404 0.361 0.322
Net Present
Value (NPV)
170.2
PV of Cash Inflows 6
PV of Cash Outlay $201

Net Present Value 30.74
Here we can see the weight and probability of each scenario and the NPV
of the project if it will be delayed for 1 year. The NPV is positive which shows
that this project will realize an inflow.
VI. Analysis of the Alternative Causes of Action
VII. Conclusion and Recommendation
Therefore we conclude, based on the given data that we were provided
with and with the computations arrived at to accept the project. With the
positive results and profitable outcome, it is advisable to be accepted.
1. What is a real option? Explain how this project can be viewed as
a real option.
A real option itself is the right but not the obligation to undertake certain
business initiatives, such as deferring, abandoning, expanding, staging, or
contracting a capital investment project.
In Kenneths initial scenario analysis, he assumed that FDA will approve
their Clearview project. Based on Kenneths analysis, they will keep the
testing nag marketing cost at $110 million and have a market penetration of
8%.
2. If you were a director on premier pharmaceuticals board would
you agree with Kenneths analysis? Explain.
3. How would the numbers turn out after taking into consideration
the contingency that the drug may not be sold until year 2 or 3
due to delay in getting FDA approval?