The interest rate is also referred to as the discount

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Unformatted text preview: hich we can purchase money in the future, the amount 1 1 1 r 2 is called the one-year discount factor. The interest rate is also referred to as the discount rate for an investment. Problem The launch of Sony’s PlayStation 3 was delayed until November 2006, giving Microsoft’s Xbox 360 a full year on the market without competition. Imagine that it is November 2005 and you are the marketing manager for the PlayStation. You estimate that if PlayStation 3 were ready to be launched immediately, you could sell $2 billion worth of the console in its first year. However, if your launch is delayed a year, you believe that Microsoft’s head start will reduce your first-year sales by 20%. If the interest rate is 8%, what is the cost of a delay of the first year’s revenues in terms of dollars in 2005? Solution ◗ Plan Revenues if released today: $2 billion. Revenue decrease if delayed: 20%. Interest rate: 8%. We need to compute the revenues if the launch is delayed and compare them to the revenues from launching today. In order to make a fair comparison, however, we need to convert...
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