7. Assume that you have successfhlly completed the R&D phase of a new product development project. This phase took several years and cost an estimated $30 million, but resulted in a successhl prototype product. Before your company can begin the marketing research phase, however, a long-time rival announces that it will have a similar product available in one year that will directly compete with your newly developed product.

Your company estimates there is a 60 percent probability that your new product will be superior to your competitor's product. If your company's product is superior, you will earn a net profit of $10 million per year; otherwise, your company will lose

$6 million per year. Senior marketing managers at your company estimate that your product will have a ten-year life span. Assuming a discount rate of 10 percent, calculate the NPV of your new product, assuming that you proceed immediately with the marketing research phase that is estimated to cost $10 million a year for two years

(however, if you learn that your competitor's product is better than yours after one year, you will terminate the market research phase after one year).

Compare your results to the case when you decide to wait for one year (to learn more about your competitor's product) before proceeding with the market research phase. If you wait a year, however, and your product is the superior product, it will have only a nine-year life span. What do you think is your best strategy?