CNCT ACC CORPORATE FINANCE
12th Edition
ISBN: 9781264604081
Author: Ross
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 7, Problem 7QAP
Summary Introduction
Adequate information:
Cash flow for success (CS) = $1,900,000
Cash flow for failure (CF) = $0
Probability of success when the product goes directly to market = 0.50
Probability of failure when the product goes directly to market = 0.50
Probability of success in case of using the focus group technique = 0.65
Probability of failure in case of using the focus group technique = 0.35
Probability of success in case of using the technique of research of a consulting firm = 0.80
Probability of failure in case of using the technique of research of a consulting firm = 0.20
Cost of conducting research = $345,000
To determine: The action that will result in the highest expected payoff to the firm.
Introduction:
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ABC Co is considering the launch of a new widget. If the product goes directly to the market, there is a 60% chance of success. For $500,000, the manager can conduct a focus group to increase the probability of success to 65%. Alternatively, the manager can pay a consulting firm $750,000 to research the market and refine the product. The consulting firm successfully launches new products 70% of the time. If the firm successfully launches the widget, the payoff will be $8 million. If the product is a failure, the NPV is $0.
Calculate the expected NPV if the managers go directly to the market.
ABC Co is considering the launch of a new widget. If the product goes directly to the market, there is a 40% chance of success. For $250,000, the manager can conduct a focus group to increase the probability of success to 60%. Alternatively, the manager can pay a consulting firm $4,000,000 to research the market and refine the product. The consulting firm successfully launches new products 80% of the time. If the firm successfully launches the widget, the payoff will be $20 million. If the product is a failure, the NPV is $0.
Based on your analysis, ABC should:
a. take the product directly to market
b. hire the consulting firm
c. conduct a focus group
Instruction: Please answer the following questions. Submit your answers (word file or PDF). Minimum of words are 300 words.
Questions. Describe the positives and negatives for this development project.
FIGURE 2.1 Project Evaluation and Selection Form
EVALUATION CRITERIA
Investment (5)
Return on Investment
Time to Market
Increase in Market Share
PROJECT EVALUATION AND SELECTION
PROJECT A
$700,000
9.1%
10 months.
2%
Risk
Chance of Success
Comments
Project A: Major competitor already has similar product and may reduce price.
Project B New technology may not work as expected.
Project C Product features may not be accepted in some international markets
Low
High
PROJECT B
$2,100,000
18.3%
16 months
5%
High
Medium
PROJECT C
$1,200,000
11.5%
12 months
3%
Medium
High
Susay at day a
Chapter 7 Solutions
CNCT ACC CORPORATE FINANCE
Ch. 7 - Forecasting Risk What is forecasting risk? In...Ch. 7 - Sensitivity Analysis and Scenario Analysis What is...Ch. 7 - Prob. 3CQCh. 7 - Break-Even Point As a shareholder of a firm that...Ch. 7 - Prob. 5CQCh. 7 - Real Options Why does traditional NPV analysis...Ch. 7 - Real Options The Mango Republic has just...Ch. 7 - Prob. 8CQCh. 7 - Prob. 9CQCh. 7 - Project Analysis You are discussing a project...
Ch. 7 - Sensitivity Analysis and Break-Even Point We are...Ch. 7 - Prob. 2QAPCh. 7 - Prob. 3QAPCh. 7 - Prob. 4QAPCh. 7 - Prob. 5QAPCh. 7 - Prob. 6QAPCh. 7 - Prob. 7QAPCh. 7 - Prob. 8QAPCh. 7 - Prob. 9QAPCh. 7 - Prob. 10QAPCh. 7 - Prob. 11QAPCh. 7 - Prob. 12QAPCh. 7 - Prob. 13QAPCh. 7 - Prob. 14QAPCh. 7 - Prob. 15QAPCh. 7 - Prob. 16QAPCh. 7 - Prob. 17QAPCh. 7 - Prob. 18QAPCh. 7 - Prob. 19QAPCh. 7 - Prob. 20QAPCh. 7 - Prob. 21QAPCh. 7 - Prob. 22QAPCh. 7 - Prob. 23QAPCh. 7 - Prob. 24QAPCh. 7 - Prob. 25QAPCh. 7 - Prob. 26QAPCh. 7 - Prob. 28QAPCh. 7 - Prob. 29QAPCh. 7 - Prob. 30QAP
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