Tree Marketing is bringing out a new product. The startup phase (phase 1) will last 2 years and will require an investment of $227,000 today. If they bring it to market without market research regarding consumer tastes, the new product will be introduced (phase 2) in 2 years. The firm believes that there is a 65 percent probability that the product will be successful and the present value of all future cash flows from the time of introduction will be $500,000. If the product is a failure, the present value of all future cash flows from the time of production will be -$100,000. Conversely, they can invest in market research before introducing the product. This would increase the chance of success to 80 percent and reduce the chance of failure to 20 percent. The market research would delay phase 2 for one year and would be done following phase 1. The research would cost an additional $63,000 after phase 1 is complete. The discount rate is 9.5 percent. 

 

i. Construct the decision tree

ii. Compute the NPV without research at time 0. 

iii. Compute the NPV with research at time 0