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 $1.29 million. By going through research, the company 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 $19.9 million. If unsuccessful, the present value payoff is only $6.9 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. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 1,234,567.89.)

NPV

Market immediately $

Research option $

Answer 1

Market immediately: Expected net present value: $ 14,050,000 -199 =19900000*55%+6900000*45% Research option: Expected net present value: 5 =(19900000*70%+6900000*30%)/(1+15%)-1290000 Go to market immediately

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