Developing radically new power system

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Reference no: EM131322219

The Walla Tech Company is developing a radically new power system that is expected to take three years to develop and cost approximately $6M per year. At the end of three years, Walla will know if the product is a technical success; at the present time, Walla managers estimate there is a 70% likelihood that they will be successful in developing the power system. Assuming the R&D succeeds, Walla can launch the product in year 4 at an estimated cost of $4M. The marketing vice president estimates that if launched, the new product would be a commercial success with probability 0.6; if it is commercially successful, it would earn gross revenues of $15M per year for five years. If not a commercial success, the new soap powder would earn only an estimated $2M per year. Assuming an annual discount rate of 12%, what is the NPV of this project? Would you recommend that Walla proceed with this project?

Reference no: EM131322219

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