The manager for a growing firm is considering the launch of a new product. If th
ID: 2764042 • Letter: T
Question
The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 40 percent chance of success. For $180,000 the manager can conduct a focus group that will increase the product’s chance of success to 55 percent. Alternatively, the manager has the option to pay a consulting firm $395,000 to research the market and refine the product. The consulting firm successfully launches new products 70 percent of the time. If the firm successfully launches the product, the payoff will be $1.95 million. If the product is a failure, the NPV is zero.
Consulting firm
NPV Go to market now $ Focus group $Consulting firm
Which action should the firm undertake? Go to market now Consulting firm Focus groupExplanation / Answer
Go to market now - expected payoff = 0.40 *1.95 million + 0.60 *0 = 0.78 million
Consulting firm = 0.70 *1.95 million + 0.30*0 - $395,000 = $970,000
Focus group expected payoff = 0.55 * 1.95 million + 0.45*0 - $180000 = $892,500
since expected payoff is highest if firm opts for consulting firm, the firm should opt for this option only to maximize profits.
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