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 $50,000 immediately (year 0), $44,000 in year 1, and $15,000 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: $126,000; Probability: 0.35
- Moderate success: Year 1: $95,000; Year 2: $75,000; Probability: 0.52
- Failure: Year 1: $55,000; Year 2: $57,000; Probability: 0.13
The company's MARR is 25%. You can ignore any other costs except for the marketing costs.
Calculate the standard deviation 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."

Answer 1

Answer:

Given that,

"A company's marketing strategy will last two years and produce revenue in years 1 and 2 only. The strategy can result in success, a moderate success, or a failure.

The marketing strategy will cost $50,000 immediately (year 0), $44,000 in year 1, and $15,000 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: $126,000; Probability: 0.35

- Moderate success: Year 1: $95,000; Year 2: $75,000; Probability: 0.52

- Failure: Year 1: $55,000; Year 2: $57,000; Probability: 0.13

The company's MARR is 25%. You can ignore any other costs except for the marketing costs.

Calculate the standard deviation of the net present worth for the strategy:

PW of costs= (50,000/ 0.25) + (44,000/ 0.25^2)=904000

PW of Benefits (Success) = (109,000/0.25) +(126,000/ 0.25^2)=2452000

PW of Benefits (Moderate Success)=( 95,000/0.25)+(75,000/0.25^2)=1580000

PW of Benefits (Failure) = (55,000/0.25) +(57,000/0.25^2)=2012000

Expected PW of Benefits = 0.35 (2452000) + 0.52(1580000) +0.13 (2012000)

=858200+821600+261560

=1941360

Expected NPW of strategy = 1941360 - 904000=1037360