Answer to Question #280810 in Finance for tofikk

Question

A firm spent $10 million to develop a product for market. In the product’s first two years, its profit was $6 million. Recently, there has been an influx of comparable products offered by competitors (imitators in the firm’s view). Now the firm is reassessing the product. If it drops the product, it can recover $2 million of its original investment by selling its production facility. If it continues to produce the product, its estimated revenues for successive two-year periods will be $5 million and $3 million and its costs will be $4 million and $2.5 million. (After four years, the profit potential of the product will be exhausted, and the plant will have zero resale value.) What is the firm’s best course of action?

Answer 1

1)According to the first option:

-10+2+6=-2

According to the first option, the company did not receive 2 million.

2)According to the second option:

-10+6+5+3-4-2,5=-2,5

According to the second option, the company did not receive 2,5 million.

in the first case, the losses are less, so you should choose the first option.