Problem 7-6 Decision Trees Ang Electronics, Incorporated, has developed a new mesh network. If successful, the present value of the payoff (when the product is brought to market) is $35 million. If the mesh network fails, the present value of the payoff is $13 million. If the product goes directly to market, there is a 60 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.4 million to test market the mesh network. Test marketing would allow the firm to improve the product and increase the probability of success to 90 percent. The appropriate discount rate is 10 percent. Calculate the NPV of going directly to market and the NPV of test marketing before going to market. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) Go to market now Test marketing first Should the firm conduct test marketing? No Yes

Ch 7. Decision Trees. For questions 12 and 13, please use the following information: Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $28.6 million. If the DVDR fails, the present value of the payoff is $10.2 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.32 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 12 percent. Calculate the NPV of going directly to market. Format answer as "XX,XXX,XXX.XX"

Ch 7. Decision Trees. For questions 12 and 13, please use the following information: Ang Electronics, Inc., has developed a new DVDR. If the DVDR is successful, the present value of the payoff (when the product is brought to market) is $28.6 million. If the DVDR fails, the present value of the payoff is $10.2 million. If the product goes directly to market, there is a 40 percent chance of success. Alternatively, the company can delay the launch by one year and spend $1.42 million to test market the DVDR. Test marketing would allow the firm to improve the product and increase the probability of success to 70 percent. The appropriate discount rate is 11 percent. Calculate the NPV of test marketing before going to market. Format answer as "XX,XXX,XXX.XX"

6 Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $5,000. Management has constructed the following table of estimates of rates of return and probabilities for pessimistic, most likely, and optimistic results: a. Determine the range for the rate of return for each of the two cameras. b. Determine the value of the expected return for each camera. c. Which camera purchase is riskier? Why? a. The range for the rate of return for camera R is %. (Round to the nearest whole number.) Financial calculator Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Initial investment Annual rate of return Pessimistic Most likely Optimistic Camera R Amount $5,000 22% 28% 32% Camera S Probability Amount Probability 1.00 $5,000 1.00 0.26 0.54 0.20 19% 25% 30% 0.23 0.59 0.18 X