Aliber Co wants to test the market for a new product for two years at an initial
Question:
Aliber Co wants to test the market for a new product for two years at an initial cost of $400,000. The purpose of this test launch is to reveal consumer preferences and the test will not generate profit. There is a 40% chance that demand will be satisfactory to follow with additional investment. In this case, Aliber will spend $3.5 million to launch the new product and generate an expected annual profit of $500,000 in perpetuity. If demand is not satisfactory, the product will be withdrawn. Once preferences are known, the product will be subject to an average degree of risk, and therefore, Aliber requires a return of 9% on its investment. However, the initial test-market phase is viewed as much riskier and demands 25% on this initial expenditure. What is the NPV?
-$152,778
$126,222
-$5,333
$0
$192,000
Understanding Business Statistics
ISBN: 978-1118145258
1st edition
Authors: Stacey Jones, Tim Bergquist, Ned Freed