Major IssueIn 2000, Rich Kender, vice president of financial evaluation and analysis at Merck & Company, was discussing the opportunity to invest in the licensing, manufacturing, and commercialization of Davanrik, a drug originally developed to treat depression from LAB Pharmaceutical products. LAB proposed to sell the right to all future profits made from Davanrik's successful launch at the cost of an initial fee, royalty payments and additional payments as the drug completed each stage of the approval process. Merck & Company's organizational goal is to constantly update the company's pharmaceutical development portfolio and reach as many customers as possible during the patent term. So there was not only the financial gain potential or the quantitative aspect of the offering, but also the qualitative value that will be added by achieving better positioning in the risky pharmaceutical sector. Presentation Team Analysis The presentation team began by providing background on the industry and companies. The main problem and financial terms were explained. However, we believe that some assumptions, such as Merck's flexibility to withdraw from building the plant in the event of a failure, were not clearly mentioned. They failed to explain why Davanrik's market risk was lower than its standalone risk. The discounted cash flow method, which is the traditional financial tool for evaluating capital allocation, was rejected without explanation. We can rationalize the failure to use DCF due to its inability to capture risk uncertainty. Passive investments like stocks and bonds are good candidates to use DCF on. Once these investments are made, investors cannot influence the generation of cash flows. We agree that the decision tree can be used to make a preliminary judgment, and real options analysis can be used to get a more definitive answer. We believe that sensitivity analysis and scenario analysis could have been useful as all inputs may change over time. Merck Investment Evaluation Decision Tree Approach: This approach is suitable for projects that do not need to be funded all at once. Profit alternatives and probabilities are identified using diagrams that are easy to understand and interpret with short explanations that provide important insights. Identifies management flexibility to reevaluate decisions using new information and then invest additional funds or terminate the project. Decision Tree Results: This analysis shows that the NPV of the project is $13.37 million. Our result is slightly different from that of the presenting team due to rounding. But both of our teams had a positive NPV, which suggests that the project should be accepted.