Athens Development Corporation is considering a new product that will be sensitive to both economic...
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Accounting
Athens Development Corporation is considering a new product that will be sensitive to both economic conditions and competitor response.The product manager has decided to focus on three economic conditions: weak economy, normal economy, and strong economy.Competitors either will or will not respond with a competitive product, and competitor response is unlikely unless economic conditions turn out to be strong.Annual cash flows for each of these conditions appear below.The product has a six-year life and will require an initial cash outlay of $332,000.The cost of capital is 7 percent.Should Athens invest in this product?Explain.
Competitor Weak Normal Strong Response Economy Economy Economy Yes $36,500 $52,000 $73,000 No $48,500 71,000 94,000
Please complete the table of net present values below:
Competitor Weak Normal Strong Response Economy Economy Economy Yes _ _ _ No
As a follow on to the prior problem, assume that the investment committee determined the probabilities below:
Probability the competitor will response 40%, will not respond 60%
Probability of each economic state over the six year horizon Weak
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