The Consumer-Mart Company is going to introduce a new consumer product. If it is brought to market without research about consumer tastes, the firm believes that there is a 60 percent chance that the product will be successful. If successful, the project has a NPV = $500,000. If the product is a failure (40 percent)and withdrawn from the market, then NPV = −$100,000. A consumer survey will cost $60,000 and delay the introduction by one year. With a survey, there is an 80 percent chance of consumer acceptance, in which case the NPV = $500,000. If, on the other hand, the product is a failure (20 percent)and withdrawn from the market, then NPV = −$100,000. The discount rate is 10 percent. By how much does the marketing survey change the expected net present value of the project?
A)Increases the NPV by $25,455
B)Decreases the NPV by $5,950
C)Increases the NPV by $8,955
D)Decreases the NPV by $25,455

Question

Quizplus · Accepted Answer

The expected NPV without the survey is calculated as follows: $0.6 \times \$500,000 + 0.4 \times (-\$100,000) = \$300,000 - \$40,000 = \$260,000$.The expected NPV with the survey, taking into account the cost of the survey and the one-year delay (using a discount rate of 10%), is: $(0.8 \times \$500,000 + 0.2 \times (-\$100,000) - \$60,000) \times \frac{1}{1.1} = (\$400,000 - \$20,000 - \$60,000) \times \frac{1}{1.1} = \$320,000 \times \frac{1}{1.1} = \$290,909.09$.The change in expected NPV due to the survey is: \$290,909.09 - \$260,000 = \$30,909.09.However, considering the choices provided and the calculation method, the closest match and intended answer seems to be an increase in NPV by $25,455, which suggests a possible miscalculation in the provided choices or an error in the interpretation of the question's details. The correct approach shows the survey increases the expected NPV, but the exact figure provided in the choices does not match the calculated result. Given the options, the intention seems to aim for demonstrating the value of additional information (the survey) in decision-making, which would typically increase the expected NPV by improving the decision basis.

The Consumer-Mart Company Is Going to Introduce a New Consumer