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 60 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.27 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 75 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $19.7 million. If unsuccessful, the present value payoff is only $6.7 million. The appropriate discount rate is 14 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.)

	NPV
Market immediately	$
Research option	$

Should the firm conduct customer segment research or go to the market immediately?

Conduct research Market immediately

Answer 1

Net Present Value (NPV) for the firm if it goes to market immediately

Net Present Value (NPV) = (Success Cash Flow x Probability of success) + (Unsuccessful cash flow x Probability of failure)

= [$1,97,00,000.00 x 0.60] + [$67,00,000.00 x 0.40]

= $1,18,20,000.00 + $26,80,000.00

= $1,45,00,000.00

“Net Present Value (NPV) for the firm if it goes to market immediately = $1,45,00,000.00”

Net Present Value (NPV) for the firm if it conducts customer segment research

Net Present Value (NPV) = [{(Success Cash Flow x Probability of success) + (Unsuccessful cash flow x Probability of failure)} / (1 + r)ⁿ] – Initial Investment

= [{($1,97,00,000.00 x 0.75) + ($67,00,000.00 x 0.25)}/ (1 + 0.15)¹] - $12,70,000.00

= [{$1,47,75,000.00 + $16,75,000.00)}/ 1.15] - $12,70,000.00

= [$1,64,50,000.00 / 1.15] - $12,70,000.00

= $1,44,29,824.56 - $12,70,000.00

= $1,31,59,824.56

“Net Present Value (NPV) for the firm if it conducts customer segment research = $1,31,59,824.56”

DECISION

“Market Immediately”. The should go to the market immediately, since it has the highest NPV of $1,45,00,000.00.