# Expected NPV

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 If demand is not satisfactory, diet scotch will be withdrawn.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?

https://brainmass.com/economics/preferences-choice/expected-npv-362054

#### Solution Preview

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 ...

#### Solution Summary

The solution explains how to calculate the expected NPV for McGregor Whiskey Company.