B&B has a new baby powder ready to market. If the firm goes directly to the mark
ID: 2666359 • 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 60 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $750,000. 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 $28 million. If unsuccessful, the present value payoff is only $5 million. Should the firm conduct customer segment research or go directly to market? The appropriate discount rate is 12 percent.Explanation / Answer
$35,000,000
$31,250,000
$750,000
$30,500,000
$28,000,000
$2,500,000
Profit at the time of initial selling It means at 60% Success = 28 Million for 75% = 28 * 75/60 = 35 Million For getting this35 million we have to spent $750,000 and one year. Additional Cash Flow Discount Rate 12% Present Value$35,000,000
0.892857143 (+1/1.12^1)$31,250,000
Less Expenditure for research$750,000
$30,500,000
Profit at 60%$28,000,000
Additional Profit$2,500,000
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