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The manager for a growing firm is considering the launch of a new product. If the...

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Finance

The manager for a growing firm is considering the launch of anew product. If the product goes directly to market, there is a 50percent chance of success. For $181,000 the manager can conduct afocus group that will increase the product’s chance of success to65 percent. Alternatively, the manager has the option to pay aconsulting firm $396,000 to research the market and refine theproduct. The consulting firm successfully launches new products 80percent of the time. If the firm successfully launches the product,the payoff will be $1.96 million. If the product is a failure, theNPV is zero.

Calculate the NPV for each option available for the project.(Do not round intermediate calculations and enter youranswers in dollars, not millions of dollars, rounded to the nearestwhole number, e.g., 1,234,567.)

Answer & Explanation Solved by verified expert
4.4 Ratings (727 Votes)

OPTION 1:PRODUCT GOES DIRECTLY TO MARKET
NPV Probability NPV*Probability
$1,960,000 0.5 $980,000
$0 0.5 $0
SUM $980,000
NPV of Option 1: Directly to Market $980,000
OPTION2:USING FOCUS GROUP TO INCREAES CHANCES
Payoff Probability Payoff*Probability
$1,960,000 0.65 $1,274,000
$0 0.35 $0
SUM $1,274,000
Expected Payoff $1,274,000
Cost of using focus group ($181,000)
NPV of Option2: Using Focus Group $1,093,000
OPTION3:PAY A CONSULTING FIRM
Payoff Probability Payoff*Probability
$1,960,000 0.8 $1,568,000
$0 0.2 $0
SUM $1,568,000
Expected Payoff $1,568,000
Fees of Consulting Firm ($396,000)
NPV of Option3: Using Consulting Firm $1,172,000
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