The Consumer-Mart Company is going to introduce a new consumer product.If brought to market without research about consumer tastes the firm believes that there is a 60% chance that the product will be successful.If successful,the project has a NPV = $500,000.If the product is a failure (40%)and withdrawn from the market,then NPV = -$100,000.A consumer survey will cost $60,000 and delay the introduction by one year.With a survey,there is an 80% chance of consumer acceptance,in which case the NPV = $500,000.If,on the other hand the product is a failure (20%)and withdrawn from the market,then NPV = -$100,000.The discount rate is 10%.By how much does the marketing survey change the expected net present value of the project?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 $5950
C)increases the NPV by $8955
D)decreases the NPV by $25,455

Question

Quizplus · Accepted Answer

The marketing survey increases the expected NPV of the project by $25,455.The expected NPV without the survey is:(0.6 * $500,000) + (0.4 * -$100,000) = $260,000The expected NPV with the survey is:(0.8 * $500,000) + (0.2 * -$100,000) = $385,455The difference between the two NPVs is $385,455 - $260,000 = $125,455. However, we need to subtract the cost of the survey, which is $60,000. Therefore, the net increase in NPV is $125,455 - $60,000 = $25,455.

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