The manager for a growing firm is considering the launch of a new product. If th
ID: 2742182 • Letter: T
Question
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 $172,000 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 $387,000 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 $1.87 million. If the product is a failure, the NPV is zero.
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 $172,000 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 $387,000 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 $1.87 million. If the product is a failure, the NPV is zero.
Explanation / Answer
Payoff for the project = $1.87 million or = $1870000
NPV for going to market now = Cashflows x probability of success
= $1870000 x 60% = $1122000
NPV for Focus Group = Cash outflows + Cashflows x probability of success
= -172000 + $1870000 x 75%
= $1230500
NPV for Consulting firm = Cash outflows + Cashflows x probability of success
= -387000 + $1870000 x 90%
= $1296000
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