Answer:
1. NPV Go to market now $25,700,000
2. NPV Test marketing first $23,560,714.29
No
Explanation:
1. Calculation to determine the NPV of going directly to market
NPV OF GOING DIRECTLY TO MARKET:
First step is to calculate the Probability of failure
Probability of failure = 100% - 40%
Probability of failure = 60%
Now let calculate the NPV of going directly to market
NPV of going directly to market = 60% * $34,500,000 + 40% * $12,500,000
NPV of going directly to market=$20,700,000+$5,000,000
NPV of going directly to market = $25,700,000
Therefore NPV of going directly to market is $25,700,000
2 Calculation to determine the NPV Test marketing before going to market:
NPV TEST MARKETING BEFORE GOING TO MARKET:
First step is to calculate the Probability of failure
Probability of failure = 100% - 70%
Probability of failure =30%
Second step is to calculate Year 1 value
Year 1 value = 70% * $34,500,000 + 30% * $12,500,000
Year 1 value=$24,150,000+$3,750,000
Year 1 value = $27,900,000
Now let calculate the NPV of test marketing before going to market
NPV of test marketing before going to market = $27,900,000 /(1 + 12%) - $1,350,000
NPV of test marketing before going to market =$24,910,714.29-$1,350,000
NPV of test marketing before going to market= $23,560,714.29
Therefore NPV of test marketing before going to market is $23,560,714.29
NO. Based on The above calculation the firm should NOT conduct test marketing before going to market reason been that the NPV is lower.
