2. Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, t
ID: 1172156 • Letter: 2
Question
2. 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 $34.2 million. If the DVDR fails, the present value of the payoff is $12.2 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 $1.32 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, 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 NoExplanation / Answer
Solution:-
a)NPV :-Go to market now=$21,000,000
NPV :-Test marketing first = $23,322,857
b)Yes the firm should conduct test marketing.
Calculations:-
a) NPV of the project going directly to market is:-
NPV= Cash flow at success*Prob. of success +Cash flow at failure *Prob. of failure
NPV=34,200,000*0.40+12,200,000*0.60
NPV= $21,000,000
b) Now we will calculate the NPV if the testing is done.
Testing requires the additional cost of $1.32million and since the project is to be shifted for 1 year , the pay off will be after 1 year , we have to calculate present value of that.
NPV = C0+ {[CSuccess(Prob. of Success)] + [CFailure(Prob. of Failure)]} / (1 + R)t
NPV= -1,320,000+(34,200,000*0.70+12,200,000*0.30)/(1+1.12)^1
NPV= $23,322,857
c) Yes the firm should conduct the marketing because the NPV is higher if marketing is done.
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