2. A publishing company has carried out a market survey estimating future demand for a new book and have

produced the following probability estimates:

Year 1 Year 2 Year 3

Likely sales Probability Likely sales Probability Likely sales Probability

5,000 0.2 5,000 0.4 5,000 0.8

10,000 0.5 10,000 0.6 10,000 0.2

20,000 0.3

(a) Calculate the expected total sales (i.e., number of books) over the three years

(b) The book's price is fixed at $10 and the variable cost of producing each book will be $2 in year 1, $3 in year

2 and $4 in year 3. Calculate the present value of this project, using a discount rate of 10 per cent per

annum. Assume that all cash flows take place at the end of the year concerned.

(c) There is a possibility of an updated soft back version of the book being published at the beginning of year 2

(the original hard-backed version would then be taken off the market at the end of year 1) with the following

estimates of sales:

Year 2 Year 3 Year 4

Likely sales Probability Likely sales Probability Likely sales Probability

20,000 0.5 10,000 0.8 5,000 0.9

30,000 0.5 20,000 0.2 10,000 0.1

(The sales will be extended by one year due to the updating)

The soft-backed book will be priced at $5 and the variable cost of producing each book will be $1 in year 2, $2 in

year 3, and $3 in year 4. Should the option to produce the soft-backed edition be taken up?