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% 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

The expected value without surveying is (0.5 x 20) + (0.5 x 2) - 5 = 7, which is positive. However, the survey can potentially increase the expected value by allowing for a more accurate prediction of voter behavior. The cost of the survey is $1 million, so the net present value of surveying is (0.5 x 20) + (0.5 x 2) - 5 - 1 = 6.5, which is higher than the expected value without surveying. Therefore, it is worth conducting the survey.

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