Should Ang Electronics, Inc. Test-Market Their New HD DVD?
What are the options Ang Electronics, Inc. is considering?
The company can either bring their new HD DVD directly to market or test-market it for a year before launching.
What are the probabilities and payoffs associated with each option?
If the HD DVD goes directly to market, there is a 60 percent chance of success with a payoff of $34.4 million, and a 40 percent chance of failure with a payoff of $12.4 million.
Alternatively, if the company conducts test-market for a year, the probability of success increases to 90 percent with the same payoffs.
What is the appropriate discount rate used in the analysis?
The appropriate discount rate used is 10 percent.
What are the NPV values for each option?
Calculate the NPV of going directly to market and the NPV of test-marketing before going to market.
NPV for going to market now: $
NPV for test-marketing first: $
Should the firm conduct test-marketing?
No
Yes
As a consultant, you need to analyze the scenario faced by Ang Electronics, Inc. and provide your recommendation based on the financial implications of their decision. Remember to calculate the NPV for both options and assess the risk versus reward of each strategy.
Ang Electronics, Inc. is at a crossroads with their new HD DVD product launch. The company must decide whether to bring the product to market immediately or conduct a test-marketing phase for a year. The outcomes and payoffs associated with each option, along with the probability of success, play a crucial role in making this decision.
If the company decides to go directly to market, there is a 60 percent chance of success, yielding a payoff of $34.4 million, and a 40 percent chance of failure, resulting in a payoff of $12.4 million. On the other hand, test-marketing the HD DVD for a year requires an investment of $1.34 million but increases the probability of success to 90 percent, maintaining the same payoffs.
To calculate the Net Present Value (NPV) for both options, you need to consider the expected payoffs and the appropriate discount rate of 10 percent. By calculating the expected payoffs, you can determine which strategy provides a higher NPV and better financial return for the company.
In this case, the expected payoff for test-marketing the HD DVD is higher at $32.2 million compared to $25.6 million for going directly to market. This indicates that conducting a test-market first would result in a higher NPV and potentially better financial outcomes for Ang Electronics, Inc.
It is important to understand that the decision between test-marketing and direct market launch should be based on maximizing the expected payoff while considering the associated risks. By performing a thorough financial analysis and weighing the probabilities and payoffs, the company can make an informed decision that aligns with their strategic goals.