You have recently been approached by a vendor that is developing technology that uses GPS technology to operate snowplows. While drivers are still required for safety purposes, the plows would be controlled by GPS technology. The new plowing technology would reduce the time it takes to plow a  property  (due to more efficient routing)  and significantly reduce property damage (since obstacles on each property can be mapped). Property damage is especially troublesome since it often results in lost customers.  

The GPS  plowing system is currently under development and can be ready for deployment in 2 years. 

You currently serve about 5,000 properties in Logan and the surrounding area. This number is expected to stay steady for the foreseeable future. There are, on average, 15 'plowable' snowfalls each year and you charge customers $40 (on average) per plowing.  Your cost to plow  (labor, depreciation,  fuel)  is $15.  About 5% of all plowings result in property damage claims from your customers. While many of these claims are minor (mailboxes etc.), some are major (scratched cars, damaged sidewalks, etc.). The average cost per claim is  $1,000.  

The new plowing systems will reduce plowing costs by  30%  and the cost of claims by  75%.  The total cost for implementing this new technology is  $6M.  Your best guess is that somewhere between  40%  -  90%  of your customer would be willing to allow you to use the new technology. The remainder will be concerned about the damage risks to their property. The planning horizon for the project is  7  seasons  (2  years of development  +  5  years of savings).  Cost savings would be realized during years  3-7 (assume cash flows occur at the  end of each year).  Only  5 years of  savings are  considered  because it is  expected  that the  technology  and  plows  will  need  to  be upgraded/replaced  after  that  time.  If  you  want  to  buy the  system,  $1M  would  be  due  up-front  and  an additional $1M would be due at the end of the first year (to fund on-going development). The remaining $4M  would be  due at the  end of Year 2  (to  purchase the  GPS equipment and retrofit the plows).  Your company uses a 18% interest rate to evaluate projects of this risk (you checked with Finance). Question 1 : Assume that 60% of your customers will allow you to use the new technology. Calculate the net present value of the project. Question 2 : It's unclear what percentage of customers will allow you to use the new system. Some/many may worry that the new system will damage their property. You can conduct a market study of your customers at the end of the 1st year which will allow you to determine whether there will be a low level of adoption (assume  40%) or a  high level of adoption (assume  90%).


For simplicity, assume that 40% OR 90% adoption are the only possible outcomes. You need to wait until the end of the 1st year to conduct the study because only at that point will you have some evidence that the new plowing system is safe. The study costs $100k and is 90% accurate, i.e.,  there is a 90% chance that whatever is predicted (40% or 90%) really occurs and a 10% chance the opposite occurs. There is an equal probability the study will find that low or high adoption is more likely. How does the study change the project valuation? Should you run the study?