NPV Calculation for Mesh Network Product Launch Decision

Should the firm conduct test marketing?

Yes, The NPV (Net Present Value) of going directly to market is $9.5 million, while the NPV of test marketing before going to market is $10.6 million.

Calculating NPV for Going Directly to Market:

The present value of the successful outcome is $34.5 million, with a 40% chance of success. This results in an expected payoff of $13.8 million. The present value of the unsuccessful outcome is $12.5 million, with a 60% chance of failure, resulting in an expected payoff of $7.5 million. To calculate the NPV, we use the formula: NPV = (Expected Payoff / (1 + Discount Rate)) - Initial Investment. For going directly to market, the NPV is: NPV = ($13.8 million / (1 + 0.12)) - $0 = $9.5 million.

Calculating NPV for Test Marketing:

Test marketing involves an additional investment of $1.35 million to increase the probability of success to 70%. The expected payoff from a successful outcome with test marketing is $24.15 million, while the expected payoff from an unsuccessful outcome is $3.75 million. Using the same NPV formula, the NPV for test marketing is: NPV = (($24.15 million + $3.75 million) / (1 + 0.12)) - $1.35 million = $10.6 million. In conclusion, the NPV of test marketing before going to market is higher than the NPV of going directly to market. Therefore, the firm should conduct test marketing to maximize the potential success of their mesh network product launch.
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