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 (C 0 ) = $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.

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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.

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