B&B has a new baby powder ready to market. If the firm goes directly to the mark

Question

B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.12 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $18.2 million. If unsuccessful, the present value payoff is only $5.2 million. The appropriate discount rate is 15 percent. Calculate the NPV for the firm if it conducts customer segment research, and if it goes to market immediately.

Explanation / Answer

Ans.)

Conclusion : The Expected NPV of the option-I is higher when compared to other option (i.e option-II) so we have to select option-I

Option-I i.e B&B has go to market research Probability Net Present Value (NPV) Expected NPV 0.7 17.08 11.956 0.3 5.2 1.56 TOTAL 13.516 Option-II i.e B & B has goes to market immediately Probability Net Present Value (NPV) Expected NPV 0.55 18.2 10.01 0.45 5.2 2.34 TOTAL 12.35

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