11. In problem 10, assume that the first phase (the R&D phase) has proceeded very well;

a successful prototype soap powder was successfully developed at the end of year 3

(at a cost of $6M each year). At the beginning of the fourth year (before the company begins developing test marketing), a long-time rival announces that it will have a similar product available next year.

Trid Soap Company managers estimate a 75 percent probability that their product is superior to the competitor's product. If Trid's product is superior, they will earn a net profit of $12M per year; otherwise, the company will lose $3M per year. Trid senior managers are considering the possibility of suspending the project for a year to get more information on their competitor's product before launching the new soap powder. If they wait, however, and their product is superior, the life span of the new product would be reduced to four years. What would you recommend in this case (the cost to launch the new product is still $4M)? (Assume an annual discount rate of 12 percent.)