Question

Need help solving this question

Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $29.9 million. If the HD DVD fails, the present value of the payoff is $6.6 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Osceola can delay the launch by one year and spend $1.42 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%. What is the.NPV of test-marketing before going to market? (Round answer to 2 decimal places. Do not round intermediate calculations)

Answer 1

NPV of test marketing = Present value of cash inflows - present value of cash outflows

NPV of test marketing = -1,420,000 + [0.8*29,900,000 + 0.2*6,600,000] / (1 + 0.1)

NPV of test marketing = -1,420,000 + [23,920,000 + 1,320,000] / 1.1

NPV of test marketing = -1,420,000 + 22,945,454.55

NPV of test marketing = $21,525,454.55,,