Problem 4. A new product has two major potential markets. The product will succeed in both or fail in both, with equal probability. The markets are otherwise independent. You may enter the markets sequentially or simultaneously either now, one year from now, or two years from now. Later entry is not feasible. Market A requires an initial investment of $100 regardless of when it is entered. If the product is successful, market A will have a present value of $150 one year after entry. If the product fails, market A will be worth $90 one year after entry. Market B requires an initial investment of $55 regardless of when it is entered. One year after entry, B will have a present value of $130 or $20 for success and failure, respectively. For simplicity, perform all discounting in this problem at 5%. _a. What is the NPV for each market, assuming each is entered immediately? _b. What are all the possible combinations of time and place for introducing the new product? Can any possibilities can be eliminated as suboptimal without further calculations? Why or why not? Which entry strategy is optimal? c. Can you state a general capital budgeting rule for selecting the optimal strategy in this and similar problems? d. Suppose there are three potential markets, A, B, and C, where A and B are as above and requires an investment of $30 regardless of when entered, and promises a return of $50 or $30 one year later. Does the decision rule you formulated in part (c.) above produce the optimal decision for this revised problem? Why or why not? Problem 4. A new product has two major potential markets. The product will succeed in both or fail in both, with equal probability. The markets are otherwise independent. You may enter the markets sequentially or simultaneously either now, one year from now, or two years from now. Later entry is not feasible. Market A requires an initial investment of $100 regardless of when it is entered. If the product is successful, market A will have a present value of $150 one year after entry. If the product fails, market A will be worth $90 one year after entry. Market B requires an initial investment of $55 regardless of when it is entered. One year after entry, B will have a present value of $130 or $20 for success and failure, respectively. For simplicity, perform all discounting in this problem at 5%. _a. What is the NPV for each market, assuming each is entered immediately? _b. What are all the possible combinations of time and place for introducing the new product? Can any possibilities can be eliminated as suboptimal without further calculations? Why or why not? Which entry strategy is optimal? c. Can you state a general capital budgeting rule for selecting the optimal strategy in this and similar problems? d. Suppose there are three potential markets, A, B, and C, where A and B are as above and requires an investment of $30 regardless of when entered, and promises a return of $50 or $30 one year later. Does the decision rule you formulated in part (c.) above produce the optimal decision for this revised problem? Why or why not
