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 $34 million. If the HD DVD fails, the present value of the payoff is $6.7 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 $1.24 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 going directly to market?
Solutions
Expert Solution
Solution :
The NPV of going directly to market = $ 23,080,000.00
The NPV of the Test Marketing Option = $ 24,705,454.55
Since the NPV of the Test Marketing Option is higher the company should go for the Test Marketing Option.
Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.
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