B&B has a new baby powder ready to market. If the firm goes directly to the mark
ID: 2783053 • Letter: B
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 60 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.21 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 75 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.1 million. If unsuccessful, the present value payoff is only $6.1 million. The appropriate discount rate is 14 percent.
Calculate the NPV for the firm if it conducts customer segment research and if it goes to market immediately. (Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
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 60 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.21 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 75 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.1 million. If unsuccessful, the present value payoff is only $6.1 million. The appropriate discount rate is 14 percent.
Explanation / Answer
Market Immediately : Present Value of initial selling = $ 19.1 Million Given probability of success = 60% Pay off if unsuccessful= $ 6.1 Million NPV of firm if sold initially = (Probability of success *Profit)- (probability of unsuccessful * Payoff) = ($ 19.1 million * 60% - 6.1 million * 40%) = $ 9.02 Million Research Option : Present Value of initial selling = $ 19.1 Million Cost of research = $ 1.21 million Present Value of selling after research= $ 19.1 Million - 1.21 million = $ 17.89 Million Given probability of success = 75% Pay off if un successful = $ 6.1 Million + 1.21 Million = $ 7.31 Million NPV of firm if sold after Research = (Probability of success *Profit)- (probability of unsuccessful * Payoff) = ($ 17.89 million * 75% - 7.31 million * 25%) = $ 11.59 Million Since NPV of firm is higher in the case of selling after reserch and hence it s advisable to sell after research.
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