The McGregor Whisky Company is proposing to market diet scotch. The product will first be test-marketed for two years in southern California at an initial cost
of $610000. This test launch is not expected to produce any profits but should reveal consumer preferences. There is a 58% chance that demand will be
satisfactory. In this case McGregor will spend $6.1 million to launch the scotch nationwide and will receive an expected annual profit of $810000 in
perpetuity. If demand is not satisfactory diet scotch will be withdrawn.
Once consumer preferences are known the product will be subject to an average degree of risk and therefore McGregor requires a return of
12% on its investment. However the initial test-market phase is viewed as much riskier and McGregor demands a return of 21% on this initial