Question
The Trid Soap Company is developing a radically new soap powder that is expected to take three years to develop and cost approximately $6M per
The Trid Soap Company is developing a radically new soap powder that is expected to take three years to develop and cost approximately $6M per year. At the end of the three years, Trid will know if the product is a technical success; at the present time, Trid managers estimate there is a 70 percent likelihood that they will be successful in developing the new soap powder. Assuming the R&D succeeds, Trid can launch the product in year 4 at an estimated cost of $4M. The marketing VP estimates that if launched, the new product would be a commercial success with probability 0.6; if it is commercially successful, it would earn gross revenues of $15M per year for five years. If not a commercial success, the new soap powder would earn only an estimated $2M per year. Assuming an annual discount rate of 12 percent, what is the NPV of this product? Would you recommend that Trid proceed with this project?
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