B&B has a new baby powder ready to market. If the firm goes directly to the market with the product, there is only a 55 percent chance of success. However, the firm can conduct customer segment research, which will take a year and cost $1 million. By going through research, B&B will be able to better target potential customers and will increase the probability of success to 70%. If successful, the baby powder will bring a present value profit (at the time of initial selling) of $30 million. If unsuccessful, the present value payoff is only $3 million. The appropriate discount rate is 15 percent. Should the firm conduct customer segment research or go directly to the market?

The decision tree is given below. Explain the process of making the decision in detail based on the decision tree (including how to compute the numbers shown in the diagram).

Success $30 million at t= 1 ($26.087 million at t=0) Research $18.0435 million at t= 0) Start Failure $3 million at t = 1 ($2.6087 million at t = 0) Success $30 million at t= 0 No Research $17.85 million at t=0 Failure $3 million at t=0 Success $30 million at t= 1 ($26.087 million at t=0) Research $18.0435 million at t= 0) Start Failure $3 million at t = 1 ($2.6087 million at t = 0) Success $30 million at t= 0 No Research $17.85 million at t=0 Failure $3 million at t=0