Answer Happy

Your company is considering launching a new toy product. You
estimate that there is an equal chance that the product will be
either a hit or a flop. If the product is a hit, it will generate
$13 million each year for the next 5 years starting in year 1. If
the product is a flop, it will only generate $6 million each year
for the next 5 years starting in year 1. Launching the new toy will
involve an initial expenditure of $30 million. The discount rate is
10%.
a) What is the NPV of the project?
b) Alternatively, you have an option to wait one year and see
how a similar product marketed by your close competitor performs
this year. There is an equal chance that the competitor’s product
will be either a hit or a flop. If the competitor’s product is a
hit, and if you develop your product in year 1 upon observing their
result, you estimate that your product would generate $10 million
each year for the next 5 years starting in year 2. If the
competitor’s product is a flop and if you develop your product in
year 1, then your product would only generate $4 million each year
for the next 5 years starting in year 2. Your company can choose to
abandon the project upon observing the competitor’s result in year
1. Developing and launching the new toy will involve an expenditure
of $30 million in year 1. What is the NPV of the project? The
discount rate is 10%.
c) What is the value of delaying your decision for one year?
Should you delay your decision?