13· value 10.00 points Ang Electronics, Inc., has developed a new DVDR. If the D

Question

13· value 10.00 points 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 $34.7 million. If the DVDR fails, the present value of the payoff is $12.7 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Ang can delay the launch by one year and spend $1.37 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. (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) NPV Go to market now Test marketing first Should thefirm conduct test marketing? No Yes References eBook & Resources

Explanation / Answer

NPV of going directly to market:

34.7 (0.60) + 12.7 (0.40) = 25.9 million= ~ $ 25900000

NPV if the launch is delayed by one year (Test Marketing):

-1.37 + 34.7 (0.90)/1.1 + 12.7 (0.10)/1.1 = 28.57 million =~ $ 28570000

NPV

Go to market now

$ 25900000

Test marketing first

$ 28570000

Should the firm conduct test marketing?

Yes, as the NPV of Test marketing is higher than the NPV of Go to market directly.

NPV

Go to market now

$ 25900000

Test marketing first

$ 28570000

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