There is a 70% chance that market conditions are most favorable for a

 

1. There is a 70% chance that market conditions are most favorable for a full nationwide advertising campaign, in which the expected NPV of the nationwide campaign would be 25M. There is a 30% chance that conditions are not favorable, in which case NPV would be 5M. What’s the maximum that you would budget for local test marketing, to determine if the most favorable conditions exist?

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a. 15M

b. 5M

c. 0

d. 2M

2. You’re considering test marketing your new product. There is 30% chance that the result will be positive, which has expected NPV of 50 million; but there is also 70% chance the test result will be negative, bringing expected NPV of negative 30 million. Or you can wait until next year when your competitors introduce similar products, where there is 30% chance of positive market conditions but with expected NPV of only 10 million, due primarily to the increased competition. Assume that the cost of capital is 0. What’s the maximum you would budget for test marketing?

a. 0

b. 4 million

c. 5 million

d. 9 million

e. 12 million

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