\"A company\'s marketing strategy will last two years and produce revenue in yea

Question

"A company's marketing strategy will last two years and produce revenue in years 1 and 2 only. The strategy can result in a success, a moderate success, or a failure.
The marketing strategy will cost $54,000 immediately (year 0), $32,000 in year 1, and $10,000 in year 2. There is uncertainty with projected revenues, but the forecasted revenues and probabilities for the marketing strategy are as follows:
- Success: Year 1: $109,000; Year 2: $113,000; Probability: 0.31
- Moderate success: Year 1: $97,000; Year 2: $69,000; Probability: 0.55
- Failure: Year 1: $42,000; Year 2: $47,000; Probability: 0.14
The company's MARR is 14%. You can ignore any other costs except for the marketing costs.
Calculate the expected value of the net present worth for the strategy.
HINT: it is easier to calculate the net present worth of each separate result first (success, moderate success, failure) before dealing with the probabilities."

Explanation / Answer

R = 14%

For Success:

Net present worth = Present value of net annual benefits – initial investment

Net present worth = (109000-32000)/1.14 + (113000-10000)/1.14^2 - 54000

Net present worth = $92799.02

For Moderate Success:

Net present worth = Present value of net annual benefits – initial investment

Net present worth = (97000-32000)/1.14 + (69000-10000)/1.14^2 - 54000

Net present worth = $48416.13

For Failure:

Net present worth = Present value of net annual benefits – initial investment

Net present worth = (42000-32000)/1.14 + (47000-10000)/1.14^2 - 54000

Net present worth = - $16757.77

So,

Expected value of net present worth = 92799.02*.31 +48416.13*.55 + (-16757.77)*.14

Expected value of net present worth = $53050.48

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