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 $33.5 million. If the DVDR fails, the present value of the payoff is $11.5 million. If the product goes directly to market, there is a 50 percent chance of success. Alternatively, Ang can delay the launch by one year and spend $1.25 million to test market the DVDR. 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.(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))

Answer 1

The NPV of going directly to market and the NPV of test marketing before going to market is $22.5 million and $24.97 million respectively

Step-by-step explanation:

The computation of the NPV of going directly to market is shown below:

= Present value of the payoff i.e market × success percentage + Present value of the payoff × failure percentage

= $33.5 million × 50% + $11.5 million × 50%

= $16.75 million + $5.75 billion

= $22.5 million

And, The computation of the NPV of going directly to market is shown below:

= (Present value of the payoff i.e market × success percentage + Present value of the payoff × failure percentage) ÷ ( 1 + discount rate) - spending amount

= ($33.5 million × 80% + $11.5 million × 20%) ÷ ( 1 + 0.11) - $1.25 million

= ($26.80 million + $2.30 million) ÷ (1.11) - $1.25 million

= ($29.10 million) ÷ (1.11) - $1.25 million

= $24.97 million