Question
Limousin Ltd has the opportunity to introduce a new product onto the market. All the company has at the present is the idea and design
Limousin Ltd has the opportunity to introduce a new product onto the market. All the company has at the present is the idea and design of the product. A prototype must the developed and tested at a cost of $400 000.There is a 70% chance that the tests Page 5 of 7 b) will be successful. If the tests are successful, Limousin Ltd will invest in manufacturing plant at a cost of $4 million. If the product is successful in the market, Limousin Ltd expects to sell 5000 units per annum over the next two years. The cash contribution per unit is $1000.There is a 60% probability that the product will be successful. If the product does not succeed in the market place, the company expects to sell 1000 units per annum over two years. The firm's cost of capital is 14%.Ingnore taxation. Advice whether Limousin should introduce the new product.
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