Ang Electronics, Incorporated, has developed a new mesh network. If successful, thepresent value of the payoff (when the product is brought to market) is $33.6 million. If themesh network fails, the present value of the payoff is $11.6 million. If the product goesdirectly to market, there is a 40 percent chance of success. Alternatively, the companycan delay the launch by one year and spend $1.26 million to test market the meshnetwork. Test marketing would allow the firm to improve the product and increase theprobability of success to 70 percent. The appropriate discount rate is 12percent. Calculate the NPV of going directly to market and the NPV of test marketingbefore going to market. (Do not round intermediate calculations and enter youranswers in dollars, not millions of dollars, rounded to the nearest whole number, e.g.,1,234,567.)Answer is complete but not entirely correct.Go to market now$Test marketing first IS20,400,00022,850,000Should the firm conduct test marketing?NoYes

Payoff in success = $33,600,000Payoff in failure = $11,600,000Probability of success = 40%…

Answered: percent. Calculate the NPV of going…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 4MC

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