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 If demand is not satisfactory, diet scotch will be withdrawn.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?
We first calculate the NPV at t=2 and then move backwards to t=0
At t=2 there are two possibilities - either the test launch is satisfactory or not. If the test launch is not satisfactory, the project will not be taken forward and ...
The solution explains how to calculate the expected NPV for McGregor Whiskey Company.