You are considering making a "Hillary" action figure to capitalize on what you are sure will be a massive resurgence political fever. Production will cost $5 million. If political fever strikes, you will sell action figures worth $20 million (in present value (PV)). If the voters do not catch the political fever, you will only sell action figures worth $2 (in PV) million as only loyal democrats will buy. Each has a 50% chance of happening. Before beginning production, 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 E(NPV without survey) = +$6 million
B) Conduct the survey as the E(NPV with survey) = $6.5 million
C) Do not conduct the survey as the E(NPV with survey) = $5 million
D) None of the above

Question

Quizplus · Accepted Answer

The expected NPV without conducting the survey is: 
(0.5 x $20 million) + (0.5 x $2 million) - $5 million = $6 million

The expected NPV with conducting the survey is: 
[(0.5 x probability of political fever given survey result) x $20 million] + [(0.5 x probability of no political fever given survey result) x $2 million] - $6 million

Conducting the survey will give you information about whether there will be a political fever or not, increasing the probability of selling the action figures for $20 million. If the survey shows that there will be a political fever, the expected NPV is $9 million. If the survey shows that there will not be a political fever, the expected NPV is $3 million.

Therefore, the expected NPV with the survey is: 
[(0.5 x 0.8) x $20 million] + [(0.5 x 0.2) x $2 million] - $6 million = $6.5 million

Conducting the survey is worth it as it increases the expected NPV by $0.5 million, making it the best choice.

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