Chapter 7, Problem 6QAP

Summary Introduction

Adequate information:

Cash flow for success (C_S) = $24,000,000

Cash flow for failure (C_F) = $8,500,000

Probability of success when product is directly going to the market = 0.50

Probability of failure when product is directly going to the market = 0.50

Probability of success when product is going to the test market = 0.80

Probability of failure when product is going to the test market = 0.20

Amount spent on testing (C₀) = $1,200,000

Appropriate discount rate (r) = 11%

To determine: Whether the test marketing should be conducted or not.

Introduction: Net present value is the difference between the aggregate values of cash inflows ad aggregate value of cash outflows for a particular period of time. It is a capital budgeting technique that evaluates various investment proposals.