Achieving Success: Calculating the NPV of Product Launch Strategies
Which strategy should Ang Electronics, Inc. choose to maximize their NPV?
Should they go directly to market with a 50% chance of success, or should they invest in test marketing to increase the probability of success to 80%?
NPV of going directly to market:
Expected value of future cash flows = ($24 million x 50%) + ($8.5 million x 50%) = $16.25 million
There is an equal chance of success or failure, so the expected value is calculated by multiplying each option by the probability and adding them together.
NPV of test marketing before going to market:
Expected value of future cash flows = ($24 million x 80%) + ($8.5 million x 20%) = $20.9 million (but delayed by 1 year)
PV of expected cash flows = -$1.2 million (marketing costs) + $20.9 million / 1.11 = $17.80 million
When making decisions about product launches, it's essential to consider all possible outcomes and probabilities to determine the most profitable strategy. In this case, Ang Electronics, Inc. is faced with the decision to either go directly to market or invest in test marketing to increase their chances of success.
The NPV of going directly to market is calculated to be $16.25 million, while the NPV of test marketing before going to market is $17.80 million. This indicates that investing in test marketing and delaying the product launch by one year could potentially result in a higher NPV for the company.
By improving the product and increasing the probability of success to 80% through test marketing, Ang Electronics, Inc. can maximize their expected cash flows and ultimately achieve greater long-term profitability. It is crucial for companies to carefully evaluate their options and consider the potential impact on NPV when making strategic decisions.