Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the
ID: 2660766 • Letter: A
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 $22.6 million. If the DVDR fails, the present value of the payoff is $8.4 million. If the product goes directly to market, there is a 48 percent chance of success. Alternatively, Ang can delay the launch by one year and spend $1.8 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 82 percent. The appropriate discount rate is 8 percent.
Calculate the NPV of going directly to market now. (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars. (e.g., 1,234,567))
Calculate the NPV of test marketing first. (Do not include the dollar sign ($). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567). Round your answer to 2 decimal places. (e.g., 32.16))
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 $22.6 million. If the DVDR fails, the present value of the payoff is $8.4 million. If the product goes directly to market, there is a 48 percent chance of success. Alternatively, Ang can delay the launch by one year and spend $1.8 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 82 percent. The appropriate discount rate is 8 percent.
Explanation / Answer
a. NPV of going to market now = success % * PV of success payoff + (1-success %) * PV of failure payoff
= 48% * 22.6 + (1-48%) * 8.4 = $ 15.22 million
b. NPV of going to market 1 year later after test marketing = ((success % * PV of success payoff + (1-success %) * PV of failure payoff) / (1+discount rate)) - test marketing cost
= ((82% * 22.6 + (1-82%) * 8.4) / (1+8%)) - 1.8 = 18.56-1.8 = $ 16.76 million
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