B&B has a new baby powder ready to market. If the firm goes directly to the mark
ID: 2804606 • 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 $1.18 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 $18.8 million. If unsuccessful, the present value payoff is only $5.8 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 $1.18 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 $18.8 million. If unsuccessful, the present value payoff is only $5.8 million. The appropriate discount rate is 15 percent.
Explanation / Answer
Answer:
Net Profit after successful: $18,800,000.
Pay-off: $5,800,000
NPV Immediately: 0.55*18,800,000-0.45*5,800,000 = $7,730,000.
NPV after research: -1,1800,000+(0.70*18,800,000-0.3*5,800,000)/1.15 =$8,750,435.
NPV of research is higher than immediate launch. Product must be launched after one year.
S.No. Initial Outlay Immediately After Research NPV 1 -1,180,000 2 Success Rate 55% 70% 3Related Questions
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