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 $1.12 million. By going through research, B&B 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 $18.2 million. If unsuccessful, the present value payoff is only $5.2 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

Answer 1

To determine if B&B should perform customer segment research, NPVs of both the research scenario and immediate market launch were calculated. Research scenario resulted in a higher NPV, suggesting it might be the preferable option using a 15% discount rate.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of whether B&B should conduct customer segment research or go to market immediately, we first need to estimate the present value (PV) of each scenario and then subtract the costs associated with each.

For the research scenario:

For the immediate market launch:

Thus, conducting customer segment research results in a higher NPV, indicating that it would be a more financially advantageous path for B&B assuming a 15% discount rate. However, this assumes the costs and profits are accurately predicted and the discount rate is appropriate.

Answer 2

1. NPV if it conducts customer segment research

NPV = $ 11.314782

2. NPV if it goes to market inmediately.

NPV = $ 10.739.130

Step-by-step explanation:

1. NPV if it conducts customer segment research.

In this case you need to use this information:

Initial investmet = $1.120.000 (research cost)

p = 70% (Probability of success)

p = 30 % (Probability of unsuccess)

(you can obtain this probability , using the probability of success and subtracting 70% from 100% )

NPV if successful = $18.200.000

NPV if unsuccessful = $5.200.000

r = 15% (Discount rate)

then

You need to use this formula

NPV = ∑
`(p.VPN)/((1+r))` -initial investment

NPV =
`( $18.200.000 x 0,7)/((1+0,15)) + ( $5.200.000 x 0,3)/((1+0,15))` - $1.120.000

NPV = $ 11.314782

2. NPV if it goes to market inmediately.

In this case you need to use this information:

p = 55% (Probability of success)

p = 45 % (Probability of unsuccess)

(you can obtain this probability , using the probability of success and subtracting 55% from 100% )

NPV if successful = $18.200.000

NPV if unsuccessful = $5.200.000

r = 15% (Discount rate)

then

You need to use this formula

NPV = ∑
`(p.VPN)/((1+r))`

NPV =
`( $18.200.000 x 0,55)/((1+0,15)) + ( $5.200.000 x 0,45)/((1+0,15))`

NPV = $ 10.739.130