I Do Not Understand How To Evaluate The Project To Proceed Or Delay It

I do not understand how to evaluate the project to proceed or delay it.

The Medical Division VP believes the division could solve its financial problems by an early launch of a new surgical product that has been under development for the past 16 months. The VP is focused solely on net income because VP bonuses are based solely on ROI.

The VP anticipates an incremental $5 million contribution margin per year. A market study predicted that there is a 70% chance of complete success for the launch. If it is launched and it proves unsuccessful, however, an incremental loss of $500,000 would result.

For internal reporting purposes, development costs are included in the investment base of a division. To stimulate speed in getting a new product idea through the design and execution stages, head office allows divisions to carry development costs for only 18 months from commencement of product design. The division currently has $3.5 million in development costs for the new product; if it were to be launched, these would be amortized over a five-year period and are represented in the incremental contribution margin or loss noted above. Failure to launch the product in the fourth quarter of 20X7 means the entire $3.5 million development expense would have to be written off on the March 31, 20X8 income statement, in compliance with company policy.

Denton is debating whether to do some more market research and increase the probability of success to 90%. This would delay the launch for at least five months, putting the project over the 18-month deadline.