The McGreger Whisky Company is proposing to market diet scotch. This product will first be test-marketed for two years in Southern California at a initial cost of $430,000. This test launch is not exected to produce any profits but should reveal consumer preferences. There is a 64% chance that demand will be satisfactory. In this case, McGregor will spend $3.8 million to launch the scotch nationwide and will receive an expected annual profit of $760,000 in perpetuity. If demand is not satisfactory, diet scotch will be withdrawn.

Once consumer preferences are known, the product will be subject to an average degree of risk, and therefore, McGregor requires a return of 15% on its investment. However, the initial test-market phase is viewed as much riskier, and McGregor demands a return of 23% on this initial expenditure.

What is the NPV of the diet scotch project?