7. Decision Trees The manager for a growing firm is considering the launch of a new product. If the product goes directly tomarket, there is a 50 percent chance of success. For $155,000 the manager can conduct a focus group that will increase theproduct's chance of success to 65 percent. Alternatively, the manager has the option to pay a consulting firm $345,000 to research themarket and refine the product. The consulting firm successfully launches new products 80 percent of the time. If the firm successfullylaunches the product, the payoff will be $1.9 million. If the product is a failure, the NPV is zero. Which action will result in the highestexpected payoff to the firm?

The calculation of the NPV of the three options: The formulae showing the above calculation:

Answered: 7. Decision Trees The manager for a…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 18PROB

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