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 firm conducts test marketing of the VRC, it will take a year and will cost $1.2 million. Through the test marketing, however, is able to improve the product and increase the probability of success to 70 percent, if the new product proves successful, the present value ( at the time when the firm starts 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.
