Aproductbasedonanewtechnologyhastwomajorpotentialmarkets.

The dominant uncertainty associated with it has to do with the technology

rather than the markets. Accordingly, the product will succeed in both or

failinboth,withequalprobability.Themarketsareotherwise

independentandmaybeenteredsequentiallyorsimultaneouslyeither

now,oneyearfromnow,ortwoyearsfromnow.MarketArequiresan

initial investment of $100 regardless of when it is entered. If the product is

successful, market A will have a present value of $160 one year after entry.

Iftheproductfails,marketAwillbeworth$80oneyearafterentry.

MarketBrequiresan initialinvestmentof$55regardlessofwhenitis

entered. One year after entry, B will have a present value of $140 or $25 for

success and failure, respectively. For simplicity, perform all discounting in

this problem at 5%.

a. WhatistheNPVforeachmarket,assumingeachisentered

immediately?

b. Examine the possible combinations of time and place for introducing the

newproduct.Cananypossibilitiesbeeliminatedassuboptimal

without further calculations? Why or why not? Which entry strategy

is optimal?

c. State a general capital budgeting rule for selecting the optimal strategy in

this and similar problems.