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McGregor Whiskey Company

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The McGregor Whiskey Company is proposing to market diet scotch. The product will be test-marketed for 2 years in Southern California at an initial cost of $500,000. This test launch is not expected to produce any profits but should reveal consumer preferences. There is a 60 percent chance that demand will be satisfactory. In this case, McGregor will spend $5 million to launch the scotch nationwide and will receive an expected annual profit of $700,000 in perpetuity. If demand is not satisfactory, diet scotch will be withdrawn. McGregor requires a 12 percent return on its investments.
What is the expected NPV of the diet scotch?

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Solution Summary

The expected NPV of the diet scotch is determined.

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PV of perpetuity = c/r = $700,000/12% = $5,833,333.33
Total PV of investments 2 years from now = ...

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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