This is the complete question:

A company faces a decision with respect to a product codenamed Card98 developed by one of its R&D laboratories. The company now needs to decide whether to proceed with test marketing Card98 or drop it completely. It is estimated that test marketing will cost 500k. Past experience indicates that only 30% of products are successful in the test market stage. For simplicity, assume that if Card98 is not successful at the test market stage, the project will be abandoned. If Card98 is successful at the test market stage, however, then the company faces a further decision relating to the size of the plant to set up to manufacture Card98. A small plant would cost 1.5M to build and could produce 25,000 units per year, while a large plant would cost 2.5M to build but produce double the amount. If a small or large plant is built, the marketing department have estimated that there is a 50-50 chance that the competition will respond with a similar product and that the price per unit sold will be as follows (assuming all production can be sold).

Large plant Small plant Competition respond 20 35 Competition do not respond 50 65

Assuming that the life of the market for Card98 is estimated to be 7 years and that the yearly plant running costs are 500k for the small plant and 800k for a large plant should the company go ahead and test market Card98? If test marketing is successful, how big of a plant should be built?

Using an annual discount rate of 8.5%, determine the expected net present value (NPV) of the preferred alternative is. When calculating NPVs, assume that the cost of test marketing is incurred up front (i.e. year 0). Further assume that if a plant is built, the cost of it is also incurred right away (i.e. year 0), while running costs and revenues are incurred at the end of year (i.e. in years 1, 2, 3, and so on)