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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 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70%.

If successful (regardless of customer segment research), B&B could choose to expand the business or not. If it chooses to expand the business, it will bring a present value profit (at the time of initial selling of the baby powder) of $20 million. If it chooses not to expand, it will bring a present value profit (at the time of initial selling of the powder) of $2 million.

If unsuccessful (regardless of customer segment research), B&B could also choose to expand the business or not. If it chooses to expand the business when unsuccessful, it will bring a present value profit (at the time of initial selling of the baby powder) of -$10 million. If it chooses not to expand, it will bring a present value profit (at the time of initial selling of the powder) of $1 million. The decision tree is given below.

Assume the appropriate discount rate is 25 percent. Should the firm conduct customer segment research or go directly to the market? Please clearly show every step of your computation.

Expand Outcome: $20 million @1 Success 70% Not Expand Outcome: $2 million @t=1 Expand Outcome: -$10 million @t=1 30% Failure Research $1 million outflow Not Expand Outcome: $1 million @t=1 Expand Outcome: $20 million @t=0 Expand No Research Success Not Expand 55% Outcome: $2 million @t=0 45% Outcome: -$10 million @t=0 Failure _Expand Expand Not Expand Outcome: $1 million @t=0 Expand Outcome: $20 million @1 Success 70% Not Expand Outcome: $2 million @t=1 Expand Outcome: -$10 million @t=1 30% Failure Research $1 million outflow Not Expand Outcome: $1 million @t=1 Expand Outcome: $20 million @t=0 Expand No Research Success Not Expand 55% Outcome: $2 million @t=0 45% Outcome: -$10 million @t=0 Failure _Expand Expand Not Expand Outcome: $1 million @t=0

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