Wardrobe Clothing Manufacturers is preparing a strategy for the fall season. One strategy is to go to a highly imaginative, new, four-gold-button sports coat. The all-wool product would be available for males and females. A second option would be to produce a traditional blue blazer line. The marketing research department has determined that the four-gold-button and traditional blue blazer lines offer the following probabilities of outcomes and related cash flows:

New Coat Blue Blazar

Expected Sales Probability Present Value of Cash Flows from Sales Probability Present Value of Cash Flows from Sales

Fantastic 0.4 $240,000 0.2 $120,000

Moderate 0.2 180,000 0.6 75,000

Dismal 0.4 0 0.2 55,000

The initial cost to get into the new coat line is $100,000 in designs, equipment, and inventory. To enter the blue blazer line, the initial cost in designs, inventory, and equipment is $60,000.

a.Calculate net present value.

Net present valueNew

CoatMarket$

Blazer Market$