Simcoe Virtual Technologies Group (SVT) has developed a new VR technology to display movies at homes. Focus
Question:
Simcoe Virtual Technologies Group (SVT) has developed a new VR technology to display movies at homes. Focus group subjects who experienced the new technology first hand reported that they felt as if they actually participated in the movie. The company has to decide when to introduce the new product to the market and in what scale. Future is of course uncertain, and SVT's current production capacity is limited. The company is considering the following two alternatives:
The first alternative is to build immediately a factory with a capacity of 1,000,000 units a year and sell the new product nationwide. It requires an investment of $30,000,000. SVT estimates that the demand will be high with probability 0.3 and low with 0.7. If the demand turns out to be high, the company will be able to sell 1,000,000 units per year for the next two years. If the demand turns out to be low, the company will be able to sell only 20,000 units per year for the next two years. Due to the fast-moving nature of the technology industry, this product can sell only for two years. At the end of the second year, the factory will have zero salvage value.
The second alternative is to test-market the product in the GTA market. SVT's current production facilities have the capacity to serve this market, so no investment is required to build a factory. SVT's estimation of high customer demand is 0.3 and low demand 0.7 in the GTA market. If the customer response in GTA is high, the company will sell 15,000 units during the first year. Rather picky GTA customers' favorable response guarantees a success of the new technology in the national market. Therefore, at the beginning of the second year, SVT will invest in production facilities, which requires $30,000,000, to introduce the product nationwide. The new factory has a capacity of 1,000,000. Nationwide demand during the second year will be 1,000,000 units. If the response in GTA is low, the company will sell only 5,000 units during the first year. Due to the low response in GTA, SVT will not introduce the new product nationally. GTA demand in the second year will remain 5,000 units. Assume that the profit margin is $50 per unit.
(a) If SVT does not test the market, what is the company's expected profit?
(b) Based on current information only, should SVT test-market in GTA? Suppose that SVT hires a market research expert to perform to predict the demand for the product.
(c) At most how much should SVT pay for the expert's prediction?