ignore the impact of Tax, what's the NPV of this project?
a wine company is proposing to market diet scotch and will be on market test for 2 yrs at initial cost of $500,000.
This test is not expected to produce any profits but should reveal consumer preferences.
There is a 60% chance that demand will be satisfied. In this case, the company will spend $5 million at the end of year 2 to launch the scotch and will receive an expected annual profit of $700,000 in perpetuity. If demand is not satisfactory, the project will be withdrawn.
Once the consumer preferences are known, the product will be subject to an average degree of risk, and therefore, the company requires a return of 12% on the investment.
However, the initial test-market phase is viewed as much riskier and the company demands a return of 40% of its initial expenditure.
$8,112,244.90
