Drink-at-Home, Inc

CASE 2: DRINK-AT-HOME, INC. Drink-At-Home, Inc. (DAH, Inc.), develops, processes, and markets mixes to be used in nonalcoholic cocktails and mixed drinks for home consumption. Mrs. Lee, who is in charge of research and development at DAH, Inc., this morning notified Mr. Dick Jones, the president, that exciting developments in the research and development section indicate that a new beverage, an instant pina colada, should be possible because of a new way to process and preserve coconut. Mrs. Lee is recommending a major program to develop the pina colada. She estimates that expenditure on the development may be as much as $100,000 and that as much as a year's work may be required. In the discussion with Mr. Jones, she indicated that she thought the possibility of her outstanding people successfully developing such a drink now that she'd done all the really important work was in the neighborhood of 90 percent. She also felt that the likelihood of a competing company developing a similar product in 12 months was 80 percent. Mr. Jones is strictly a bottom line guy and is concerned about the sales volume of such a beverage. Consequently, Mr. Jones talked to Mr. Besnette, his market research manager, whose specialty is new product evaluation, and was advised that a market existed for an instant pina colada, but was some-what dependent on acceptance by both grocery stores and retail liquor stores. Mr. Besnette also indicated that the sales reports indicate that other firms are considering a line of tropical drinks. If other firms should develop a competing beverage the market would, of course, be split among them. Mr. Jones pressed Mr. Besnette to make future sales estimates for various possibilities and to indicate the present (discounted value of future profits) value. Mr. Besnette provided Table 1. Mr. Besnette's figures did not include (1) cost of research and development, (2) cost of new production equipment, or (3) cost of introducing the pina colada. The cost of