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 If the product is a failure (40%) and withdrawn from the market, then NPV = -$100,000.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. If the survey is successful, then there is an 80% chance of consumer acceptance, in which case the NPV =
$500,000. If, on the other hand the survey is a failure, 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? (approximately)
A) Increase the NPV by $25,455
B) decrease the NPV by $5950
C) decrease the NPV by $8955
D) decrease the NPV by $25,455

Question

Quizplus · Accepted Answer

The marketing survey increases the expected NPV of the project by $25,455. This is because the survey provides information that reduces the uncertainty about the product's success. With the survey, the firm knows that there is an 80% chance of success if the survey is successful, and a 40% chance of success if the survey is a failure. This information allows the firm to make a more informed decision about whether to launch the product, and it increases the expected NPV of the project.

The Consumer- Mart Company Is Going to Introduce a New