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1、Chapter 8: Strategy and Analysis in Using Net Present ValueConcept Questions - Chapter 88.1What are the ways a firm can create positive NPV.1. Be first to introduce a new product.2. Further develop a core competency to product goods or services at lower costs than competitors.3. Create a barrier tha
2、t makes it difficult for the other firms to compete effectively.4. Introduce variation on existing products to take advantage of unsatisfied demand5. Create product differentiation by aggressive advertising and marketing networks.6. Use innovation in organizational processes to do all of the above.H
3、ow can managers use the market to help them screen out negative NPV projects?8.2What is a decision tree?It is a method to help capital budgeting decision-makers evaluating projects involving sequential decisions. At every point in the tree, there are different alternatives that should be analyzed.Wh
4、at are potential problems in using a decision tree?Potential problems 1) that a different discount rate should be used for different branches in the tree and 2) it is difficult for decision trees to capture managerial options.8.3What is a sensitivity analysis?It is a technique used to determine how
5、the result of a decision changes when some of the parameters or assumptions change.Why is it important to perform a sensitivity analysis?Because it provides an analysis of the consequences of possible prediction or assumption errors.What is a break-even analysis?It is a technique used to determine t
6、he volume of production necessary to break even, that is, to cover not only variable costs but fixed costs as well.Describe how sensitivity analysis interacts with break-even analysis.Sensitivity analysis can determine how the financial break-even point changes when some factors (such as fixed costs
7、, variable costs, or revenue) change.Answers to End-of-Chapter ProblemsQUESTIONS AND PROBLEMSDecision Trees8.1 Sony Electronics, Inc., has developed a new type of VCR. If the firm directly goes to the market with the product, there is only a 50 percent chance of success. On the other hand, if the fi
8、rm conducts test marketing of the VCR, it will take a year and will cost $2 million.Through the test marketing, however, the firm is able to improve the product and increase the probability of success to 75 percent. If the new product proves successful, the present value (at the time when the firm s
9、tarts selling it) of the payoff is $20 million, while if it turns out to be a failure, the present value of the payoff is $5 million. Should the firm conduct test marketing or go directly to the market? The appropriate discount rate is 15 percent.8.1Go directly:NPV = 0.5 $20 million + 0.5 $5 million
10、 = $12.5 millionTest marketing:NPV = -$2 million + (0.75 $20 million + 0.25 $5 million) / 1.15 = $12.13 millionGo directly to the market.8.2 The marketing manager for a growing consumer products firm is considering launching a new product. To determine consumers interest in such a product, the manag
11、er can conduct a focus group that will cost $120,000 and has a 70 percent chance of correctly predicting the success of the product, or hire a consulting firm that will research the market at a cost of $400,000. The consulting firm boasts a correct assessment record of 90 percent. Of course going di
12、rectly to the market with no prior testing will be the correct move 50 percent of the time. If the firm launches the product, and it is a success, the payoff will be $1.2 million.Which action will result in the highest expected payoff for the firm?8.2Focus group: -$120,000 + 0.70 $1,200,000 = $720,0
13、00Consulting firm: -$400,000 + 0.90 $1,200,000 = $680,000Direct marketing: 0.50 $1,200,000 = $600,000The manager should conduct a focus group.8.3 Tandem Bicycles is noticing a decline in sales due to the increase of lower-priced import products from the Far East. The CFO is considering a number of s
14、trategies to maintain its market share. The options she sees are the following: Price the products more aggressively, resulting in a $1.3 million decline in cash flows.The likelihood that Tandem will lose no cash flows to the imports is 55 percent; there is a45 percent probability that they will los
15、e only $550,000 in cash flows to the imports. Hire a lobbyist to convince the regulators that there should be important tariffs placed upon overseas manufacturers of bicycles. This will cost Tandem $800,000 and will have a 75 percent success rate, that is, no loss in cash flows to the importers. If
16、the lobbyists do not succeed, Tandem Bicycles will lose $2 million in cash flows. As the assistant to the CFO, which strategy would you recommend to your boss?Accounting Break-Even Analysis8.3Price more aggressively:-$1,300,000 + (0.55 0) + 0.45 (-$550,000)= -$1,547,500Hire lobbyist:-$800,000 + (0.75
