Question
Creative Labs has developed a new smart watch. If the smart watch is successful, the present value of the payoff (at the time the product
Creative Labs has developed a new smart watch. If the smart watch is successful, the present value of the payoff (at the time the product is brought to market) is $17.2 million. If the smart watch fails, the present value of the payoff is $5.4 million. If the product goes directly to market, there is a 50 percent chance of success. Alternatively, Creative Labs can delay the launch by one year and spend $0.6 million to test-market the smart watch. Test-marketing would allow the firm to improve the product and increase the probability of success to 70%. The appropriate discount rate is 12%. Should the firm conduct test-marketing? Yes, because the NPV increases by $406,306 Yes, because the NPV increases by $351,121 Yes, because the NPV increases by $296,429 No, because the NPV decreases by $424,713 No, because the NPV decreases by $287,498
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