I keep getting wrong answers! The manager for a growing firm is consideing the l

Question

I keep getting wrong answers!

The manager for a growing firm is consideing the launch of a new product If the product goes directly to market there is a 60 percent chance of success For $179,000 the manager can conduct a focus group that will increase the product's chance of success to 75 percent. Alternatively, the manager has the option to pay a consulting firm $394,000 to research the market and refine the product. The consulting firm successfully launches new products 90 percent of the time. If the firm successfully launches the product, the payoff will be $1 94 milion If the product is a failure, the NPV is zero Calculate the NPV for each option available for the project (Do not round intermediate calculations Enter your answers in dollars, not millions of dollars, e.g. 1.234,561, 1ounded to the nearest whole number, e.g. 32) NPV Go to market now Focus group Which action should the firm undertake Consulting firm Focus group Go to market now

Explanation / Answer

Payoff on successful lunch = $1,940,000

Case1: Go to market now: Expense = 0; Probability of Success = 60%

Hence, NPV = $1940000*0.6 = $1,164,000

Case2: Focus group: Expense = $179,000; Probability of Success = 75%

Hence, NPV = $1940000*0.75 - $179,000 = $1,276,000

Case3: Consulting Firm: Expense = $394,000; Probability of Success = 90%

Hence, NPV = $1940000*0.90 - $394,000 = 1,352,000

Since, NPV in case3 (using consulting firm) is the highest, it is the preferred way for implementation.

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