However, it would increase the probability of success to 75%. The relevant discount rate is 11%. Should Gadgeteer test market the widget?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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13. Gadgeteer Inc. is planning the market strategy for their new widget. They could bring it directly to market. This would result in a 40% chance of a successful launch (and therefore a 60% chance of an unsuccessful one). A successful launch would result in a NPV of $22 million. A failed one would result in a negative NPV of $9 million. Or, they could test market the product for two years (thus delaying any potential launch by two years). The test marketing would also cost a present value of $1.5 million. However, it would increase the probability of success to 75%. The relevant discount rate is 11%. Should Gadgeteer test market the widget?

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