Question

2 Problem 7-7 Decision Trees 20 points 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 $165,000 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 $380,000 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 $1.8 million. If the product is a failure, the NPV is zero. eBook n References Calculate the NPV for each option available for the project. (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) , e.g., 1,234 569 dollars, not millions of not round intermediat Go to market now Focus group Consulting firm Which action should the firm undertake? Focus group Go to market now Consulting firm

Answer 1

Expected payoff Go to market now $ 720,000 =1800000*0.4 $ Focus group 990,000 =1800000*0.55 Consulting firm $ 1,260,000 = 1800000*0.7 Less: Cost - S 165,000 $ 380,000 Net present value $ 720,000 $ 825,000 $ 880,000 Consulting firm option should be selected, as it has highest NPV

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