This preview shows page 1. Sign up to view the full content.
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?
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...
View Full Document
- Spring '07