Sony Electronics, Inc., has developed a new type of VCR. If the firm directly goes to the market with the product, there is only a 50 percent chance of success. On the other hand, if the firm conducts test marketing of the VCR, it will take a year and will cost \($2\) million.

Through the test marketing, however, the firm is able to improve the product and increase the probability of success to 75 percent. If the new product proves successful, the present value at the time when the firm starts selling it) of the payoff is \($20\) million, while if it turns out to be a failure, the present value of the payoff is \($5\) million. Should the firm conduct test marketing or go directly to the market? The appropriate discount rate is 15 percent.