Adequate information: Cash flow for success (C S ) = $24,000,000 Cash flow for failure (C F ) = $8,500,000 Probability of success when product is directly going to the market = 0.50 Probability of failure when product is directly going to the market = 0.50 Probability of success when product is going to the test market = 0.80 Probability of failure when product is going to the test market = 0.20 Amount spent on testing (C 0 ) = $1,200,000 Appropriate discount rate (r) = 11% To determine: Whether the test marketing should be conducted or not. Introduction: Net present value is the difference between the aggregate values of cash inflows ad aggregate value of cash outflows for a particular period of time. It is a capital budgeting technique that evaluates various investment proposals.

Question

Want to see the full answer?

Answer 1

Question

Chapter 7, Problem 6QAP

Summary Introduction

Adequate information:

Cash flow for success (C_S) = $24,000,000

Cash flow for failure (C_F) = $8,500,000

Probability of success when product is directly going to the market = 0.50

Probability of failure when product is directly going to the market = 0.50

Probability of success when product is going to the test market = 0.80

Probability of failure when product is going to the test market = 0.20

Amount spent on testing (C₀) = $1,200,000

Appropriate discount rate (r) = 11%

To determine: Whether the test marketing should be conducted or not.

Introduction: Net present value is the difference between the aggregate values of cash inflows ad aggregate value of cash outflows for a particular period of time. It is a capital budgeting technique that evaluates various investment proposals.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Ang Electronics, Incorporated, has developed a new mesh network. If successful, the present value of the payoff (when the product is brought to market) is $34.9 million. If the mesh network fails, the present value of the payoff is $12.9 million. If the product goes directly to market, there is a 50 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.39 million to test market the mesh network. Test marketing would allow the firm to improve the product and increase the probability of success to 80 percent. The appropriate discount rate is 11 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.) PLEASE GIVE WHOLE NUMBERS Go to market now first Test marketing

Ang Electronics, Incorporated, has developed a new mesh network. If successful, the present value of the payoff (when the product is brought to market) is $33.6 million. If the mesh network fails, the present value of the payoff is $11.6 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.26 million to test market the mesh network. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 12 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.) Answer is complete but not entirely correct. Go to market now $ Test marketing first IS 20,400,000 22,850,000 Should the firm conduct test…

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 $34.8 million. If the DVDR fails, the present value of the payoff is $12.8 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.38 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 12 percent. Calculate the NPV of going directly to market and the NPV of test marketing before going to market.