You are considering making a "Hillary" action figure to capitalize on popular political fever. Production will cost $5 million. If political fever strikes, you will sell action figures worth $20 million (in present value [PV]). If voters do not catch the political fever, you will only sell action figures worth $2 million (in PV)as only loyal Democrats will buy. Each possibility has a 50 percent chance. However, before production begins, you can conduct a marketing survey to determine which scenario will happen. The survey costs $1 million. Is it worth conducting the survey? Why?
A)Do not conduct the survey as the NPV without a survey = +$6 million.
B)Conduct the survey as the NPV with a survey = $6.5 million.
C)Do not conduct the survey as the NPV with a survey = $5 million.
D)Do not conduct the survey as the NPV with a survey = $4 million.

Question

Quizplus · Accepted Answer

Without conducting the survey, the expected NPV of the project is:
(0.5 x $20 million) – $5 million + (0.5 x $2 million) = $6 million

If the survey is conducted, the expected NPV of the project is:
(0.5 x $20 million) – $5 million – $1 million + (0.5 x $2 million) = $6.5 million

Therefore, conducting the survey increases the expected NPV of the project by $0.5 million, making it worth the investment.

You Are Considering Making a "Hillary" Action Figure to Capitalize