Question: You are the manager of a specialty retailing firm that
You are the manager of a specialty retailing firm that is considering two strategies for getting into the Malaysian retail market. Under the first strategy, the firm will make an initial investment of $10 million and can expect to capture about 5% of the overall market share. Under the second strategy, the firm will make a much larger commitment of $40 million for advertising and promotion and can expect to capture about 10% of the market share. If the overall size of the market is $200 million, the firm’s cost of capital is 12%, and the typical life of a project in the firm is 15 years, what would the operating margin have to be for the firm to consider the second strategy? (You can assume that the firm leases its stores and has no depreciation or capital expenditures.)
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