CMA Final · Strategic Financial Management · Evaluation of Risky Proposals for Investment Decisions
Under a decision-tree analysis, Neel Pharma plans a launch. A success has probability 0.6 with NPV of Rs 90 lakh, and failure has probability 0.4 with NPV of minus Rs 30 lakh. A pilot study costing Rs 5 lakh, if skipped, leaves these outcomes unchanged. What is the expected NPV of launching without the pilot study?
The expected NPV is Rs 42 lakh. Weighting the success NPV of Rs 90 lakh by 0.6 gives Rs 54 lakh, and weighting the failure NPV of minus Rs 30 lakh by 0.4 gives minus Rs 12 lakh; the pilot cost does not apply when skipped.
- ARs 54 lakh
- BRs 42 lakhCorrect
- CRs 60 lakh
- DRs 37 lakh
Explanation
Expected NPV = 0.6 x 90 + 0.4 x (-30) = 54 - 12 = Rs 42 lakh. Rs 54 lakh ignores the loss branch. The pilot cost is irrelevant as the pilot is skipped.
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