Goody Foods has developed choc o spice cookies with a distinct flavour it believes will be popular with young people. The product will be test marketed in Atlantic Canada for two years. It requires an initial investment of $2 million and because of heavy promotional expenses, it is not expected to generate any positive cash flows after tax (CFAT) during the first two years. There is a 60 percent chance that demand for the choc o spice cookies will be satisfactory; if that is so, a further investment cost of $5 million will be incurred in Year 2 to market the cookies nationwide. The subsequent CFATs expected are $4 million, $7 million, and $6 million, in years 3, 4, and 5, respectively. The cookies will be withdrawn from the market if the test market results are unfavourable (a 40 percent chance) in Year 2.
Goody Foods considers the project to be of average risk, with a 14 percent opportunity cost of Capital. The company intends to use net present value analysis to determine whether it will be worthwhile to go forward with the project. What decision should the company make?