Question
Toyota is studying the introduction of a new Sports Utility Vehicle (SUV) model to the U.S. market. Toyota has plans to test market the new
Toyota is studying the introduction of a new Sports Utility Vehicle (SUV) model to the U.S. market. Toyota has plans to test market the new SUV in Texas. The cost of this limited introduction has a price tag of $7.5 million. The market test will last two years. After the two-year market test, Toyota will need to invest an additional $25 million to introduce the new SUV model to the entire U.S. market. A financial analyst working for Toyota estimates there is 40% chance the new SUV model will be highly successful, a 40% chance it will have moderate success, and a 20% it will have mediocre success. The financial analyst also estimates the net cash flows will be $10 million for 10 years if the SUV has high success, $6 million for 10 years if it has moderate success, and $2 million for 10 years if it has mediocre success. Toyota uses a cost of capital of 7.5% for this type of projects. Ignoring the cost of the two-year test, what is the NPV of the highly successful scenario? Round your answer to 1 decimal, enter your answer in millions, do not use $ signs in you answer.
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