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Value of conducting indepth marketing research study

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Reference no: EM131615944

Your firm is considering whether the value of conducting an indepth marketing research study in order to better assess the attractiveness of introducing a new product. If the firm enters without the study, then it estimates a 40% chance the product will be successful and generate an NPV of $300,000. Without the study, there is a 60% chance the product will not be successful and will generate an NPV of -$100,000. Doing the survey will delay entry by one year but the chances of success increase to 45%. The NPVs remain the same for success or failure but cash flows are delayed by one year (i.e., the NPV of success of $300,000 is as of one year from now under the survey approach). Assume a relevant cost of capital of 10%.

1. What is the expected value of the NPVs, factoring in the probabilities of success or failure, assuming the firm does not do the study?

2. What is the expected value of the NPVs, factoring in the probabilities of success or failure, assuming the firm does the study?

3. Based on your answers to numbers 1 and 2, should the firm do the study assuming that the cost of the study is $5 million?

4. Based on your answers to numbers 1 and 2, what is the breakeven amount that the firm should be willing to pay for the study?

Reference no: EM131615944

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