B&B has a new baby powder ready to market. If the firm goes directly to the mark
ID: 2709350 • 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 $1.17 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 $18.7 million. If unsuccessful, the present value payoff is only $5.7 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, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16)).
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, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16)).
Explanation / Answer
Calculation of NPV for the firm if it goes to market immediately :
Present value (PV)
Probability
Expected PV
A
B
A*B
Profit, if Successful
$ 18,700,000
60%
$ 11,220,000
Profit, if unsuccessful
$ 5,700,000
40%
$ 2,280,000
NPV (Net Present value)
$ 13,500,000
Calculation of NPV for the firm if it conducts customer segment research :
Present value (PV)
Probability
Expected PV
A
B
A*B
Cost of segment research
$ (1,170,000)
100%
$ (1,170,000)
Profit, if Successful
$ 18,700,000
60%
$ 11,220,000
Profit, if unsuccessful
$ 5,700,000
40%
$ 2,280,000
NPV (Net Present value)
$ 12,330,000
We can see that NPV is more if it goes to market directly.
Hence it is better for firm to go to the market immediately
Calculation of NPV for the firm if it goes to market immediately :
Present value (PV)
Probability
Expected PV
A
B
A*B
Profit, if Successful
$ 18,700,000
60%
$ 11,220,000
Profit, if unsuccessful
$ 5,700,000
40%
$ 2,280,000
NPV (Net Present value)
$ 13,500,000
Calculation of NPV for the firm if it conducts customer segment research :
Present value (PV)
Probability
Expected PV
A
B
A*B
Cost of segment research
$ (1,170,000)
100%
$ (1,170,000)
Profit, if Successful
$ 18,700,000
60%
$ 11,220,000
Profit, if unsuccessful
$ 5,700,000
40%
$ 2,280,000
NPV (Net Present value)
$ 12,330,000
We can see that NPV is more if it goes to market directly.
Hence it is better for firm to go to the market immediately
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