Hello, I need a little help figuring out the answer to this homework problem. Ca

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Hello,

I need a little help figuring out the answer to this homework problem. Can someone help me?

.00 points Problem 9-7 Decision Trees The manager for a growing firm is considering the launch of a new product. If the product goes directly to market, there is a 60 percent chance of success. For $169,000, the manager can conduct a focus group that will increase the product's chance of success to 75 percent. Alternatively, the manager has the option to pay a consulting firm $384,000 to research the market and refine the product. The consulting firm successfully launches new products 90 percent of the time. If the firm successfully launches the product, the payoff will be $1.84 million. If the product is a failure, the NPV is zero. Calculate the NPV for each option available for the project. (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars (e.g. 1,234,567).) NPV Go to market now Focus group Consulting firm Which action should the firm undertake? Focus group O Go to market now Consulting firm

Explanation / Answer

Go to market

NPV = Payoff x probability of success = $1,840,000 x 60% = $1,104,000

Focus group

NPV = (Payoff x probability of success) - Cost to conduct focus group

or, NPV = ($1,840,000 x 75%) - $169,000 = $1,211,000

Consulting firm

NPV = (Payoff x probability of success) - Cost of hiring consulting firm

or, NPV = ($1,840,000 x 90%) - $384,000 = $1,272,000

The firm should undertake a consulting firm, as NPV is highest in that case.

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