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 $1.23 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 $19.3 million. If unsuccessful, the present value payoff is only $6.3 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	$

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

• Conduct research

• Market immediately

Answer 1

Answer:-

Scenario 1:- NPV if firm goes to market immediately

NPV of the project is success = $19.3 million

NPV of the project is not success = $6.3 million

As 55% probability of success is there, the expected NPV =$19.3 x 0.55 + $6.3 x 0.45 = $13.45 Million

Scenario 2:- NPV if firm conducts customer segment research

Going for a research option will delay the launching with the extra initial cost

NPV of the project is success = $19.3 million

NPV of the project is not success = $6.3 million

As 70% probability of success, the expected NPV at year 1= $19.3 x 0.70 + $6.3 x 0.30 = $15.40 million  

So, NPV as of now =$15.40 / 1.15 − $1.23

= $13.39 - $1.23

= $12.16 million

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

Answer:- As, Scenario 1 > Scenario 2, so firm should go for market immediately.

So, Option for going to Market immediately is correct.