Question

Project A Probability of technical success 0.8 Probability of commercial success 0.5 Profit/year $2 million Total cost $1 million Project lifetime (years) 10

Project B Probability of technical success 0.7 Probability of commercial success 0.9 Profit/year $2.5 million Total cost $1.2 million Project lifetime (years) 7

Project C Probability of technical success 0.9 Probability of commercial success 0.8 Profit/year $1.2 million Total cost $1.5 million Project lifetime (years) 5

What is the expected return over the lifetime of each project?

Which one project would you choose now?

Please show the formula calculated for the question above.

Answer 1

Formula to use=

ECV=Expected Commercial Value=(NPVxP - C)*P -D)

where

NPV=Present value for future earnings

P=probability of commercial success(given technical Success)

C=Commercialization Cost

P=Probability of technical success

D=Development Cost(remaining in the project)

Project A

P=(0.8x0.5)/0.8=0.5

P=0.8

Here the formula would easily be of the form of

Net commercial value=(2*10*.5)*.8)-1=9

Firm B=(2.5*7**.7*.9)-1.2=9.825

Firm C=(1.2*5*.9*.8)-1.5=2.82

Therfore firm B is most profitable.

I hope above clarifies everything, if you have any doubts please feel free to ask,

Best of Luck!