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…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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A furniture's store is considering tow marketing strategies: a loyalty program that would cost $3,000 and increase revenue by $15,000, or a seasonal sale that would cost $5,000 and increase revenue by $25,000. The store's contribution margin is 30%. Which strategy should they pursue if the goal is to maximize ROMI? What about if the goal is to maximize revenue growth?
Wildhorse's managers have determined that variable costs per unit will increase by 16% beginning next month. To offset this increase in costs, they are considering a 10% increase in the sales price. Market research indicates that the price increase will result in a 2% decrease in the number of learning systems Wildhorse sells. What will be Wildhorse's expected operating income if the price increase is implemented? (Round per unit calculations to 2 decimal places e.g. 52.75 and final answer to O decimal places, eg. 5,275.) Operating income %24
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The cooked-up Spread Trade. You are bullish on Ford motor company (F). You are bullish on F, and want to take a position. You think that today provides an opportunity as they have taken a hit on their price. You feel that the true intrinsic value of the firm is $15 a share. You decide that the December calls giving you about eight months of exposure is optimal, and you have the data on the calls below. You also feel that the maximum value that the firm could have under the best circumstance is $17 a share. Your first spread trade idea. You decide you want to decide to purchase (long) a $12 call option. To decrease the cost, you decide you want to sell (short) ten $17 calls. If you made this trade, what is the: a) Ford’s breakeven price for the trade
Provide Answer Without Fail And provide With Definition
13. Gadgeteer Inc. is planning the market strategy for their new widget. They could bring it directly to market. This would result in a 40% chance of a successful launch (and therefore a 60% chance of an unsuccessful one). A successful launch would result in a NPV of $22 million. A failed one would result in a negative NPV of $9 million. Or, they could test market the product for two years (thus delaying any potential launch by two years). The test marketing would also cost a present value of $1.5 million. However, it would increase the probability of success to 75%. The relevant discount rate is 11%. Should Gadgeteer test market the widget?
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Bear Paints is a national paint manufacturer and retailer. (Click the icon to view additional information.) Assume that management has specified a 20% target rate of return. Read the requirements. Requirement 1. Calculate each division's ROI. First enter the formula, then calculate the ROI for each division. (Enter the ROI as a percent rounded to the nearest hundredth of a percentage, X.XX%.) Paint Stores Paint Stores Consumer Requirement 2. Calculate each division's sales margin. Interpret your results. Enter the formula, then calculate the sales margin for each division. (Enter the sales margin as a percent rounded to the nearest hundredth of a percentage, X.XX%.) Sales margin Consumer Interpret your results. The Paint Stores Consumer + The Paint Stores + Consumer + Division is more profitable on each dollar of sales. Requirement 3. Calculate each division's capital turnover. Interpret your results. First enter the formula, then calculate the capital turnover for each division.…
Risk and return to investment: a buyer for a department store must decide whih designs the stores will carry before he knows what the demand will be in the coming season. The designs, A and B, have the following probability of succeeding and their associate costs with failure. The cost of the initial investment is $30,000. Design A: probability of success (0.80), with a pay-off from success ($90,000), and cost from failure ($50,000). Design B: Probability of success (0.70), pay-off from success ($70,000), and cost from failure ($10,000) Which design should the department store choose based on the expected value of the net benefit? state the expected net return to the project and show work.

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