Practice questions for final

# Practice questions for final - Calculate the NPV of the...

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Calculate the NPV of the expected payoff for the option of going directly to market. NPV(Go Directly) = C Success (Prob. of Success) + C Failure (Prob. of Failure) = \$20,000,000 (0.50) + \$5,000,000 (0.50) = \$12,500,000 The expected payoff of going directly to market is \$12,500,000. The test marketing requires a \$2 million cash outlay. Choosing the test marketing option will also delay the launch of the product by one year. Thus, the expected payoff is delayed by one year and must be discounted back to year 0. NPV(Test Market) = -C 0 + [C Success (Prob. of Success)] / (1+r) T + [C Failure (Prob. of Failure)] / (1+r) T = -\$2,000,000 + [\$20,000,000 (0.75)] / (1.15) + [\$5,000,000 (0.25)] / (1.15) = \$12,130,434.78 The expected payoff of test marketing the product is \$12,130,434.78. Sony should go directly to market with the product since that option has the highest expected payoff. 1. Calculate the NPV of each option. The manager should pursue the option with the highest NPV. NPV(Go Directly) = C Success (Prob. of Success) = \$1,200,000 (0.50) = \$600,000 The NPV of going directly to market is \$600,000. NPV(Focus Group) = C 0 + C Success (Prob. of Success) = -\$120,000 + \$1,200,000 (0.70) = \$720,000 The NPV when conducting a focus group is \$720,000. NPV(Consulting Firm) = C 0 + C Success (Prob. of Success) = -\$400,000 + \$1,200,000 (0.90) = \$680,000 The NPV when hiring a consulting firm is \$680,000. The firm should conduct a focus group since that option has the highest NPV. 2. Recommend the strategy that has the highest NPV. NPV(Lower Prices) = C Success (Prob. of Success) + C Failure (Prob. of Failure) = -\$1,300,000 (0.55) - \$1,850,000 (0.45) = -\$1,547,500 NPV(Lobbyist) = C 0 + C Success (Prob. of Success) + C Failure (Prob. of Failure) = -\$800,000 - \$0 (0.75) - \$2,000,000 (0.25) = -\$1,300,000

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The CFO should hire the lobbyist since that option has the highest NPV. 3. Apply the accounting profit break-even point (BEP) formula and solve for the sales price, x , that allows the firm to break even when producing 20,000 calculators. In order for the firm to break even, the revenues from the calculator sales (number of calculators sold × sales price per unit) must equal the total annual cost of producing the calculators. Remember to include taxes in the analysis. Variable costs = \$15 per calculator Fixed costs = \$900,000 per year Depreciation = (Initial Investment / Economic Life) = (\$600,000 / 5) = \$120,000 per year Divide the after-tax sum of the depreciation expense and the fixed costs by the calculator’s after- tax contribution margin (selling price, x , minus variable cost). The after-tax contribution margin is the amount that each additional calculator contributes to the firm’s profit. Before the firm can realize a positive profit, it must have earned enough to cover its fixed costs and depreciation expense. Solve for x . [(Fixed Costs + Depr.) (1–T
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## This note was uploaded on 07/16/2011 for the course ACCOUNTING 203 taught by Professor Jones during the Spring '11 term at Kaplan University.

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Practice questions for final - Calculate the NPV of the...

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