Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the
ID: 2709349 • 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 $33.6 million. If the DVDR 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, Ang can delay the launch by one year and spend $1.26 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. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to nearest whole dollar amount. (e.g., 32))
NPV Go to market now NPV = $???
Test marketing first NPV = $???
Should the firm conduct test marketing? No OR Yes
Explanation / Answer
Going to market now
Ps = 0.40 PVs = 33.60 Million
Pf = 1-0.40 =0.60 PVf = 11.60 Million
NPV = Ps x PVs + Pf x PVf
= 0.40 x 33.60 million + 0.60 x 11.60 Million
= 20.40 Million
Test marketing first
Ps = 0.70 PVs = 33.60 Million
Pf = 1-0.70 =0.30 PVf = 11.60 Million
NPV = (Ps x PVs + Pf x PVf)/(1+r) - cost of test marketing
= (0.70 x 33.60 million + 0.30 x 11.60 Million)/(1+0.12) -1.26 million
= 27 million/1.12 -1.26 million
= 22.85 million
Yes, since the npv of test marketing option is higher, it should conduct test marketing.