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 40 percent chance of success. For $168,000 the manager can conduct a focus group that will increase the product's chance of success to 55 percent. Alternatively, the manager has the option to pay a consulting firm $383,000 to research the market and refine the product. The consulting firm successfully launches new products 70 percent of the time. If the firm successfully launches the product, the payoff will be $1.83 million. If the product is a failure, the NPV is zero. Calculate the NPV for each option available for the project. (Do not round intermediate calculations. Enter your answers in dollars, not millions of dollars, i.e. 1,234,567) NPV Go to market now Consulting firm Which action should the firm undertake? Consulting firm Focus group Go to market now

Explanation / Answer

Since NPV for Consulting form is highest it should be chosen

Payoff 1830000 Cost Payoff % Payoff NPV Go to market now 0 0.4 732000 732,000 Focus group 168000 0.55 1006500 838,500 Consulting firm 383000 0.7 1281000 898,000

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