Question

Eagle beverages limited wants to introduce a fruit-based drink in Spain. Eagle has assets of $300 million and is looking at different alternatives to market the drink. Alternative 1: Perform a test only in the Barcelona market area and then decide whether or not to market it nationally. Alternative 2: Introduce the beverage nationally without running any tests. Alternative 3: Without any testing decide not to introduce the beverage. If there is no market study, then it is believed that there is a 55% chance of success nationally. If there is success nationally, then the assets for the company will grow by $600 million. If it fails then the assets will decrease by $200 million. If there is a market study undertaken then the cost will be $60 million and the probability of local success in Barcelona is 60% with a 40% chance of failure. If there is success locally, then the probability of success nationally is 85%. If there is a local failure in Barcelona then the chances of national success are 10%. The company wants to maximize its success, so what should the company do?

Answer 1

Answer :

As per the Given data ,lets calculate EMV of test for all the three alternatives:

Alternative 1:

EMV of test in Barcelona = [0.6 *{ 0.85x600-0.15x200} + 0.4 { 0.1x600-0.9x200}] -60 = (288 -48-60) = 180

Alternative 2:

EMV of national introduction without test = 0.55x600-0.45x200 = 330-90 =240

Alternative 3:

EMV of not introduce beverages =0

Alternative 2 is the best option. Comapny can Introduce the beverage nationally without running any tests.It may maximize Eagle beverages limited success.