Question

Consumer-Mart Company is going to introduce a new consumer product. If it is brought to market without research about consumer tastes, the firm believes that there is a 60 percent chance that the product will be successful. If successful, the project has a NPV = $500,000. If the product is a failure (40 percent) and withdrawn from the market, then NPV = −$100,000. A consumer survey will cost $60,000 and delay the introduction by one year. With a survey, there is an 80 percent chance of consumer acceptance, in which case the NPV = $500,000. If, on the other hand, the product is a failure (20 percent) and withdrawn from the market, then NPV = −$100,000. The discount rate is 10 percent. By how much does the marketing survey change the expected net present value of the project?

Select one:

a. Increases the NPV by $25,455

b. Decreases the NPV by $5,950

c. Increases the NPV by $8,955

d. Decreases the NPV by $25,455

e. None of the above

Answer 1

Ans) a. Increases the NPV by $25455

If new consumer product is launched today, Expected NPV = (500000 x Probability of success) + (-100000 x Probability of faliure)

= (500000 x 60%) + (-100000 x 40%)

= 300000 - 40000

= 2,60,000 $

If ew consumer product is launched after one year

Expected NPV =[(500000 x Probability of success) + (-100000 x Probability of faliure)]/(1+r)^n - Initial cost of market research

= [(500000 x 80%) + (-100000 x 20%)]/(1+10%)^1 - 60000

= [400000 - 20000]/1.1 - 60000

= 380000/1.1 - 60000

= 345455 - 60000

= $ 285455

Thus NPV will increase by $25455 ( $285455 - $260000)