Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the

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. f 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 $1.27 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. (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 the firm conduct test marketing? O Yes O No

Explanation / Answer

NPV of Go to market now =probability of success * pay off in case of success + probability of failure * pay off in case of failure = 60% * 33.7 + 40% * 11.7 = 24,900,000

NPV of Test Marketing = - Amount spent to test DVDR + (probability of success * pay off in case of success + probability of failure * pay off in case of failure)/1.10 = - 1.27 + (90% *  33.7 + 10% * 11.7)/1.10 = 27,366,364

The firm should conduct test marketing because NPV is higher

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