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The company that you manage has invested $5 million in developing a new product, but the
Chapter 1, Problem Problems and Applications 1.5(choose chapter or problem)
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?
Questions & Answers
QUESTION:
The company that you manage has invested $5 million in developing a new product, but the development is not quite finished. At a recent meeting, your salespeople report that the introduction of competing products has reduced the expected sales of your new product to $3 million. If it would cost $1 million to finish development and make the product, should you go ahead and do so? What is the most that you should pay to complete development?
ANSWER:Step 1 of 2
Here, $5 million has been invested already, and so if I reject the project completely, the company will incur a loss of $5 million. Therefore, if the project continues, then an extra $1 million is required, which will scale up the total investment amount from $5 million to $6million, but on the other hand, as $3 million sales can get generated, the loss can get reduced to $3 million from 5 million and so I will take up the project for at least reducing the losses.