3. The manager for a growing firm is considering the launch of a new product. If

Question

3. 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 $185,000 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 $400,000 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 $2 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, rounded to the nearest whole number, e.g., 32.) Go to market now Focus group Consulting firm Which action should the firm undertake? Go to market now Consulting firm Focus group

Explanation / Answer

NPV of go to market now = 0.6 * 2,000,000 = $1,200,000

NPV of focus group = -185,000 + 0.75*2,000,000 = $1,315,000

NPV of consulting firm = -400,000 + 0.9*2,000,000 = $1,400,000

Since consulting firm has the highes NPV, consulting firm action should be undertaken

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