Question

1 The production facility has been set up. Assuming a gorilla that has previously owned a pair of sneakers has a 60% chance of continuing to buy a new pair of sneakers each year (retention rate), with a 10% cost of capital, is it worth giving away free samples?

Yes

No

2）How can we increase the value of our investment?

A. Increase the occasions when gorillas want to wear sneakers

B. Sell custom gorilla sneaker shoe laces (at 0.50 profit per)

C. Sell to orangutans as well

D. All of the above

Answer 1

1. Yes, It is worth giving away free samples as the retention rate is 60% whereas the cost of capital is 10%.

Assuming the price to be $100 and Cost of capital= 10% of 100 = $10

Then expected returns = 0.6(100)+0.4(0) = 60

i.e Expected Profit = $60-$10 = $50

2. Answer is D

If the occasions increase to wear the sneakers, the gorilla's demand for the sneakers would also increase and result in higher sales

Custom shoe laces provides an opportunity to customize and thus imporves margins.

By selling to orangutans as well the size of market increases which results in increased sales .