Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your company is planning to introduce a new online shopping service.To reduce risk, senior management propose developing the service in three stages: A market test

Your company is planning to introduce a new online shopping service.To reduce risk, senior management propose developing the service in three stages:

A market test for one year with a few customers at a cost of $1 million. The likelihood of success for this test is estimated to be 75%.

A introductory period of one year, if the market test is successful. During this test the most widely ordered products will be available through the service to a wider audience. This phase of the project is estimated to cost $2.5 million with have a 50% chance of success.

Full roll-out of the service at the end of the second year if the introductory period is successful. This phase is estimated to cost $15 million and is expected to start generating revenue only by the end of the third year.

There are 3 possible outcomes from the full roll out:

OutcomeProbabilityYear 4 RevenueYear 5 RevenueYear 6 RevenueYear 7 Revenue

Huge Success25%$12M$15M$18M$21M

Moderate Success50%$7M$9M$11M$13M

Failure25%-$3M-$4M-$5M-$6M

i) Construct a decision tree and list all the outcomes and cumulative probabilities (it may be easier to construct the tree in a different program and copy and paste into Excel)

ii) Assume all the values are present values. Should the company pursue this project based on the expected NPV?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Technical Analysis The Complete Resource For Financial Market Technicians

Authors: Charles Kirkpatrick, Julie Dahlquist

3rd Edition

0134137043, 978-0134137049

More Books

Students also viewed these Finance questions

Question

2. Find five metaphors for communication.

Answered: 1 week ago