Expected Profits in Year 1 When Launching the Marketing Campaign Expected profits Y1 w/ mktg.

Question

Expected Profits in Year 1 When Launching the Marketing Campaign

Expected profits Y1 w/ mktg. campaign ≈ ($11.22m - $6.49m) × 80% - $1m ≈ $2.78m > $1.18m

Why the marketing cost is substructed after profit calculation and multiplication by 80%?

Answer 1

Hi there,

Basically, you need to remove the investment in marketing regardless of the profits you have achieved by then from winning the tender, which is why you deduct the 1M at the end.

Best,
Cristian

Answer 2

Hi there,

Thank you very much for this question. I would be happy to share the solution to it:

In the additional information of section "1.1.3. Probability of Winning Tender", it is stated "We estimate that if Sprinker is willing to run a marketing campaign for $1m, their chances of winning the closed tender will increase to 80%.”
As such, given that the total investment in the marketing campaign of $1m will be spent, one needs to substract it as it is.

If you would like a more detailed discussion on how to best prepare for your upcoming interviews, please don't hesitate to contact me directly.

Best,

Hagen

Answer 3

Hi there,

Great question! Hagen has already answered, but make sure to read all sections of a case to better understand. Additionally, these are the types of “tricks” that are common in cases so the interviewer can check that you are thinking rationally about things (even if you have not “learned” that exact thing)

Answer 4

The way to calculate expected profits is (revenue - cost)*probability of success + (revenue - cost)*probability of failure. We should cont marketing costs twice i.e marketing costs* 0.8 + marketing costs *0.2, because it is included regardless of outcome => subtract marketing cost directly, since we just multiply it by 1.