Sentosa Company Is Considering Launching a New Product Which It

question 13

Multiple Choice

Sentosa Company is considering launching a new product which it believes has a 70% probability of success. The company is, however, considering undertaking an advertising campaign costing £60,000, which would increase the probability of success to 95%. If successful the product would generate income of £240,000 otherwise £84,000 would be received.
What is the maximum amount that the company should be prepared to pay for advertising?

• A) £34,800
• B) £21,000
• C) £39,000
• D) £60, 000

---

Definitions:

Average Accounting Return

A measure of profitability calculated as the average net income divided by the average book value of investment over a period.

Annual Net Incomes

The total profit of a company after all expenses and taxes have been deducted from revenues for one year.

Salvage Value

The estimate of an asset's worth at the end of its useful life.

Average Accounting Return

A financial ratio that measures the net profit of a project or investment as a percentage of its initial cost.