Case Scenario:
Roper fashions is preparing a product strategy for the fall season. One option is to go to a highly imaginative new, four-gold-button sport coat with special emblems on the front pocket. The all-wool product would be for both males and females. A second option would be to produce a traditional blue blazer line. The marketing research department has determined that the new, four-gold-button coat and traditional blue blazer line offer the probabilities of outcomes and related cash flows shown below.
New Coat
Expected Sales Probability Present Value of Cash Flows from Sales
Fantastic 0.5 $130,000
Moderate 0.2 $70,000
Dismal 0.3 $0
Blazer
Probability Present Value of Cash Flows from Sales
0.3 $65,000
0.4 $50,000
0.3 $35,000
The initial cost to get into the new coat line is $50,000 in designs, equipment, and inventory. The blazer line would carry an initial cost of $30,000.
1) Diagram a complete decision tree of possible outcomes. Take the anlysis all the way through the process of computing expected NPV (last column) for each investment.
2) Give the analysis in part a, would you automatically make the investment indicated?