Question
A is planning on developing a new product. It has a 55% chance of being successful and a 45% chance of failing. Based on the
A is planning on developing a new product. It has a 55% chance of being successful and a 45% chance of failing. Based on the information below, should A test the new product? Show your work.
Successful Test:
Year 1 cost: $1,200,000
Year 2 through 5:
Revenue: $6,000,000
Variable Costs: $2,000,000
Fixed Costs: $1,100,000
Depreciation: $200,000
Tax Rate: 30%
WACC: 10%
Unsuccessful Test:
Year 1 cost: $1,200,000
Year 2 through 5:
Revenue: $3,500,000
Variable Costs: $2,000,000
Fixed Costs: $1,100,000
Depreciation: $200,000
Tax Rate: 30%
WACC: 10%
Based upon the above information, if revenue drops 10%, what is the percentage change in the Net Present Value (NPV)? Show your work.
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