Question

The Consumer-Mart Company is going to introduce a new consumer product. If brought to market without research about consumer tastes the firm believes that there is a 60% chance that the product will be successful. If successful, the project has a NPV = $300,000. If the product is a failure (40%) and withdrawn from the market, then NPV = -$100,000. A consumer survey will cost $40,000 and delay the introduction by one year. With a survey, there is an 80% chance of consumer acceptance, in which case the NPV = $300,000. If, on the other hand the product is a failure (20%) and withdrawn from the market, then NPV = -$100,000. The discount rate is 10%. By how much does the marketing survey change the expected net present value of the project?

A step by step approach would be helpful

Answer 1

Calculation of NPV without market research

Calculation of NPV

Possibility	NPV	Probability	Weighted NPV
Acceptance	300000	0.6	180000
Withdrawal	(100000)	0.4	(40000)

Total NPV = $140000

Calculation of NPV with market research

Possibility	NPV	Probability	Weighted NPV
Acceptance	300000	0.80	240000
Withdrawal	(100000)	0.20	(20000)

Total NPV =$220000 (assuming Cost of research is already adjusted in the given NPV)

Present Value of Total NPV= $(220000/1.1)=$200000 (As if research is done , this NPV will be realised after a year so it should be discounted)

Differential NPV in both approach= $(200000-140000) =$60000