A new product has two major potential markets. The product will succeed in both
ID: 2775259 • Letter: A
Question
A new product has two major potential markets. The product will succeed in both or fail in both, with equal probability. The markets are otherwise independent. You may enter the markets sequentially or simultaneously either now, one year from now, or two years from now. Later entry is not feasible. Market A requires an initial investment of $100 regardless of when it is entered. If the product is successful, market A will have a present value of $150 one year after entry. If the product fails Market A will be worth $90 one year after entry. Market B requires an initial investment of $55 regardless of when it is entered. One year after entry, B will have a present value of $130 or $20 for success and failure, respectively. For simplicity, perform all discounting in the problem at 5%.
a. What is the NPV for each market, assuming each is entered immeadiately?
Explanation / Answer
Answer :-
Market - A
Investment = $100
=(.5*150*.952)
=71.4
=(.5*90*.952)
=42.84
NPV = Present Value - Investment
= 114.24 - 100
= $ 14.24
Market - B
Investment = $55
=(.5*130*.952)
=61.88
=(.5*20*.952)
=9.52
NPV = Present Value - Investment
= 71.40 - 55
= $ 16.4
Year Probability (Equal) Amount PVIF at 5% Present Value 1 .5 150 .952=(.5*150*.952)
=71.4
1 .5 90 .952=(.5*90*.952)
=42.84
TOTAL 114.24Related Questions
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