Problem 7-8 Decision Trees
B&B has a new baby powder ready to market. If the firm...
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Problem 7-8 Decision Trees
B&B has a new baby powder ready to market. If the firm goesdirectly to the market with the product, there is only a 65 percentchance of success. However, the firm can conduct customer segmentresearch, which will take a year and cost $1.16 million. By goingthrough research, B&B will be able to better target potentialcustomers and will increase the probability of success to 80percent. If successful, the baby powder will bring a present valueprofit (at time of initial selling) of $18.6 million. Ifunsuccessful, the present value payoff is $5.6 million. Theappropriate discount rate is 13 percent.
Calculate the NPV for the firm if it conducts customer segmentresearch and if it goes to market immediately. (Do notround intermediate calculations and enter your answers in dollars,not millions of dollars, rounded to 2 decimal places, e.g.,1,234,567.89.)
NPV
Market immediately. ------
Research option. ------
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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
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