Ang Electronics Inc Develops New Dvdr

Ang Electronics Inc Has Developed A New Dvdr If The Dvdr Is Suc

Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $22.1 million. If the DVDR fails, the present value of the payoff is $9.5 million. If the product goes directly to market, there is a 47 percent chance of success.

Alternatively, Ang can delay the launch by one year and spend $1.1 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 76 percent. The appropriate discount rate is 8 percent.

Required: (a) Calculate the NPV of going directly to market now. (b) Calculate the NPV of test marketing first. Enter your answers in dollars (not millions), rounded to 2 decimal places for part (b).

Paper For Above instruction

The decision-making process in product development projects such as the launch of a new digital versatile disc recorder (DVDR) involves complex financial evaluations. Accurately calculating the net present value (NPV) of different strategies helps firms optimize outcomes and allocate resources effectively. This paper explores the calculation of NPVs for an immediate market launch versus a delayed, test-marketing strategy using specified financial data.

Part A: NPV of Immediate Market Launch

To compute the NPV of launching the DVDR immediately, we need to consider the potential payoffs associated with success and failure, their probabilities, and the appropriate discount rate. The expected payoff (EP) is calculated as follows:

  • Expected payoff if successful: $22.1 million, with a success probability of 47% (0.47).
  • Expected payoff if unsuccessful: $9.5 million, with a failure probability of 53% (1 - 0.47).

Therefore, the expected value (EV) of launching now is:

EV = (0.47 × 22.1 million) + (0.53 × 9.5 million) = 10.387 million + 5.035 million = 15.422 million.

Since the payoffs are already present values provided in millions of dollars, to obtain NPV, we subtract the initial investment. However, the initial investment amount is not explicitly given for the direct launch scenario, implying the EV represents the payoff considering the investment has already been made or is embedded within the payoff values. For the purpose of this calculation, the NPV is equivalent to the expected payoff, adjusting for the embedded investment considerations.

Alternatively, if the initial investment is zero or included in the payoff figures, we can interpret the NPV as EV discounted at 8% over time. Typically, for immediate launch, the present value is considered as such, and the calculation becomes:

NPV = EV / (1 + discount rate)^t

Assuming immediate launch (t=0), the NPV equates directly to EV, which is: $15,422,000.

Part B: NPV of Test Marketing Strategy

If Ang delays the launch by one year and spends $1.1 million on test marketing, the expected increased success probability is 76%. The expected payoffs are recalculated based on these new probabilities and payoffs:

  • Expected payoff if successful: $22.1 million at 76% probability.
  • Expected payoff if unsuccessful: $9.5 million at 24% probability.

Expected value before considering test marketing costs:

EV = (0.76 × 22.1 million) + (0.24 × 9.5 million) = 16.796 million + 2.28 million = 19.076 million.

But the test marketing incurs a cost of $1.1 million, so the net expected payoff becomes:

Net EV = 19.076 million - 1.1 million = 17.976 million.

Since the test marketing strategy involves delaying the project by one year, discounting this net payoff back to present value at an 8% rate yields:

NPV = 17.976 million / (1 + 0.08)^1 = 17.976 million / 1.08 ≈ 16.649 million.

Expressed in dollars, the NPV is approximately $16,648,611.11.

Summary:

  • NPV of immediate launch: approximately $15,422,000
  • NPV of test marketing first: approximately $16,649,000

These calculations assist the company in making an informed strategic choice—whether to launch immediately or invest in test marketing to improve success probabilities and potential payoffs.

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