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 60 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1.17 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 75 percent. If successful, the baby powder will bring a present value profit (at time of initial selling) of $18.7 million. If unsuccessful, the present value payoff is only $5.7 million. The appropriate discount rate is 14 percent.

Calculate the NPV for the firm if it conducts customer segment research and if it goes to market immediately. (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answers to 2 decimal places (e.g., 32.16)).
Should the firm conduct customer segment research or go to the market immediately?
a. Conduct Research b. Market immeduately

Answer 1

After calculating the Net Present Value (NPV) of both scenarios, B&B should conduct customer segment research before marketing their new baby powder, as it yields a higher NPV of $12.5263 million compared to $13.5 million for going to market immediately.

Step-by-step explanation:

To calculate the Net Present Value (NPV) for B&B's options, we first consider the case with research:

1. Success NPV: $18.7 million × 75% = $14.025 million
2. Failure NPV: $5.7 million × 25% = $1.425 million
3. Cost of Research: -$1.17 million (since it's a cost)
4. Total NPV with Research: $14.025m + $1.425m - $1.17m = $14.28 million, then discounted by 14% for one year becomes $14.28 million / (1 + 0.14) = $12.5263 million

Next, we calculate the NPV for going to market immediately:

1. Success NPV: $18.7 million × 60% = $11.22 million
2. Failure NPV: $5.7 million × 40% = $2.28 million
3. Total NPV without Research: $11.22m + $2.28m = $13.5 million (this is already at present value because there's no delay)

Recommendation: B&B should conduct customer segment research, as the NPV of conducting research is higher ($12.5263 million vs $13.5 million) when considering the one-year delay and the cost of research.