5. Athens Development Corporation is considering a new product that will be sensitive to both economic conditions and competitor response. The product manager has decided to focus on three economic conditions: a weak economy, a normal economy, and a strong economy. Competitors either will or will not respond with a competitive product, and competitor response is unlikely unless economic conditions turn out to be strong. Annual cash flows for each of these conditions appear below. The product has a five-year life and will require an initial cash outlay of $432,000. The cost of capital is 7.5 percent. Should Athens invest in this product? Explain.

Competitor Weak Normal Strong
Response Economy Economy Economy

Yes $36,500 $62,000 $93,000
No $48,500 91,000 142,000

Complete the table of net present values below:

Competitor Weak Normal Strong
Response Economy Economy Economy

Yes $ ______ $______ $______
No $ ______ $______ $______

6. As a follow on to the prior problem, assume that the investment committee determined the probabilities below:

The probability the competitor will respond 30%, will not respond 70%

Probability of each economic state over the six-year horizon Weak – 5%., Normal – 80%, and Strong 15%

Please complete the table of joint probabilities (by multiplying the economy probability by the competitor response probability) below and then calculate the expected net present value.

Competitor Weak Normal Strong
Response Economy Economy Economy

Yes ______% ______% ______%
No ______% ______% ______%

The expected net present value is ________________.

Answer rating: 100% (QA)

5 The Competitors Responds Weak Economy Years 0 1 2 3 4 5 Rate 75 Initial outlay 432000 Annual c... View the full answer