Question

Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $33.7 million. If the DVDR fails, the present value of the payoff is $11.7 million. If the product goes directly to market. there is a 60 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.27 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 90 percent. The appropriate discount rate is 10 percent. Calculate the NPV of going directly to market and the NPV of test marketing before going to market. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Go to market now Test marketing first Should the firm conduct test marketing? No • Yes < Prev 3 of 20 !!! Next >

Answer 1

А =11700000*40%+33700000*60% 1 Go to market now: 2 Expected net present value: 3 $ 24,900,000.00 4 5 Test marketing first: 6 Expected net present value: 7 $ 27,366,363.64 =(11700000*10%+33700000*90%)/(1+10%)-1270000 8 9 Yes, It should conduct test marketing

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