Question
In: Finance
Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the...
Osceola Electronics, Inc., has developed a new HD DVD. If the HD DVD is successful, the present value of the payoff (at the time the product is brought to market) is $29.5 million. If the HD DVD fails, the present value of the payoff is $7.9 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, Osceola can delay the launch by one year and spend $1.14 million to test-market the HD DVD. Test-marketing would allow the firm to improve the product and increase the probability of success to 80%. The appropriate discount rate is 10%.
What is the NPV of test-marketing before going to market? (Round answer to 2 decimal places. Do not round intermediate calculations)
Solutions
Expert Solution
Probability of Failure =1-Probability of Success =1-60%
=40%
The expected pay off of NPV in case of going to market
=Probability of Success*PV of Payoff in success + Probability of
Failure*PV of Payoff in failure
=60%*29.5+40%*7.9 =20.86
Investment in test market =1.14
Probability of Failure =1-Probability of Success =1-80% =20%
The expected pay off of NPV in case of test market
=Probability of Success*PV of Payoff in success + Probability of
Failure*PV of Payoff in failure
=80%*29.5+20%*7.9 =25.18
NPV of Test marketing =25.18/(1+10%)-1.14 =21750909.09
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