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

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 50 percent chance of success. For $173,000 the manager can conduct a focus group that will increase the product’s chance of success to 65 percent. Alternatively, the manager has the option to pay a consulting firm $388,000 to research the market and refine the product. The consulting firm successfully launches new products 80 percent of the time. If the firm successfully launches the product, the payoff will be $1.88 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 50 percent chance of success. For $173,000 the manager can conduct a focus group that will increase the product’s chance of success to 65 percent. Alternatively, the manager has the option to pay a consulting firm $388,000 to research the market and refine the product. The consulting firm successfully launches new products 80 percent of the time. If the firm successfully launches the product, the payoff will be $1.88 million. If the product is a failure, the NPV is zero.

Explanation / Answer

1)

NPV:

Go to market now = 1880000*50% + 0*50%

Go to market now = $ 940000

Focus group = 1880000*65% + 0*(1-65%)

Focus group = 1,222,000

Consulting firm = -388000 + 1880000*80% + 0*(1-80%)

Consulting firm= 1,116,000

2)

Which action should the firm undertake?

Consulting firm

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.