B&B has a new baby powder ready to market. If the firm goes directly to the mark
ID: 2782894 • 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 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.26 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.6 million. If unsuccessful, the present value payoff is only $6.6 million. The appropriate discount rate is 15 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, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
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 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.26 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.6 million. If unsuccessful, the present value payoff is only $6.6 million. The appropriate discount rate is 15 percent.
Explanation / Answer
Let us find the NPV for the firm if it conducts customer segment research
Cost = - $ 1.26 Million
If successful,
PV of Profit at initial selling = $ 19.6 M
PV of Profit at time 0 = 19.6/(1+15%) = $ 17.04 M
NPV if successful = 17.04 -1.26 = $15.78 M
If unsuccessful, PV of payoff = $ 6.6 M
NPV if unsuccesssful = -1.26 + 6.6/1.15 = $ 4.48 M
So , Expected NPV with 70% chance of success and 30% chance of not successful is
15.78* 0.7 + 4.48* 0.3 = $ 12.39 Million
Now, Let us find out the NPV if the firm goes to market directly,
PV of payoff is successful = $ 19.6 M and PV if unsuccessful = $ 6.6 M
So Expected Payoff(NPV if go to market) = 19.6* 0.55 + 6.6* 0.45 = $ 13.75 Million
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