Based upon the following inputs, propose the optimal course of action for this venture:

• Probability of success: 30%; probability of failure: 30%; base case probability: 40%
• Cost of initial investment is $20mm
• Success NPV: $70mm; Base case NPV: $25mm
• Two upfront options:
  • Staged investment of $10mm/stage; no impact on probabilities or scenario NPV but allows abandonment after first stage investment in case of anticipated failure
  • Deferral of investment by 1 year to pursue $3mm feasibility study; decreases odds of failure by 10% and shifts odds evenly to success and base case
• Two midpoint options (assumes either success or base case scenario):
  • Operate venture indefinitely and realize full NPV
  • Reinvest for new market expansion under the same terms as the upfront option with the following changes:

Chance of success is lowered by 5% and chance of failure is increased by 5%

Upfront cost is higher by $5mm but PV of future cash flows remains unchanged